Review - Last Week of August

It seems to be a difficult time for predictive indicators at the moment, at least insofar as being able to identify the day for a high in this particular rally. A drop does seem to be clearly on the cards, but when?

XSO has for one week been showing relative weakness to the XJO (blue arrow) for the first time in a long time!

Longer time frame is still a matter of higher highs for the XSO though (yellow lines) so it's hard to give a lot of weight to the bearish weakness at this point.

For the US market the McClellan Oscillator and Summation Index is still trending down, as they have been for about six weeks. The NYMO is almost to an oversold level (circa -150) so a small drop could even mean an 'oversold' bounce.

The rest of the breadth indicators that I'm tracking (cumulative A-D, new lows, etc.) look basically ok. It can drop from here of course but if it does then they weren't predictive.

Sentiment indicators suggest a fall is coming but they are a mixed bag:

• CNN fear/greed index was on the high side but is dropping fast. Something may come of it but if the wait is too long then the indicator is of dubious value to me.
• NAAIM sentiment survey is still very high.. High enough to indicate perhaps a small crash is coming.
• AAII Bull and Bear sentiment is very neutral, and even slightly bullish.
• RYDEX asset allocations are firmly bearish, although the commitment to bullish funds is mid range so something is going on there that I don't have a handle on.
• Equity Put/Call ratio is relatively low and the 20 ema ticked up this week, a possible sign of a high in place.
• VIX is moving higher (as you should expect with a couple of down days). Not short term predictive that I can see at the moment.
• FAGIX:VUSTX ratio looks ok on a short term basis. Intermediate term is v. bearish though.

Bulkowski's indicator printed a new sell signal. Allow up to 7 days of hindsight (wow!) but pay attention... it may not change and may be a good timing clue

Potential cycle pivots are:

• late August/early September (low)
• mid September (high)
• early to mid October (low)

Note that an inversion will switch the polarity of the pivots.

Cycle aspects have a potential mid September low.

Late October and late December both have very positive aspects, especially late December, however the intervening valley is the question.

Tough to call at the moment. Breadth indicators suggest that the top is already in. Option B seems to be a small drop followed by another divergent high. Either way it seems that prices should be significantly lower a month or two from now.

NAAIM sentiment update

This is soooooooo bearish!

Sentiment

The contrarian and proper view of market sentiment suggests that the next tradable market move will be down, at least for the short term.

Rydex asset allocations can move to a more extreme level, but not by much.

AAII data indicates a lack of strong opinions, both bullish and bearish.

McLellan Oscillators show the peeling off of breadth over the last month or more. Another divergent high is certainly possible though.

In addition to the above the equity put-call ratio has been low (chart not shown).

On the bullish side the price action of the Russell and Nasdaq indicies are not diverging from the SP500 just yet. 

Perhaps a significant drop is preceded buy a sharp upward spike!... 

XSO

On a long term basis the XSO index has shown a sharp upmove followed by a comparatively long (more than 2 x) decline that failed to break lower.




This is the same set up that the Chinese markets were showing a couple of years ago.




At this point I can't see any reason to think that the outcome will be any different!