Sep 15

Market outlook for 17th September 2012 – Blow out top?

I went heavy short at markets at SPX 1430-1440 level as I suspected markets had topped out there – but after Ben Bernanke announced QE3 which I really did not expect, markets had a sharp rally up to 1475 for the week. I’m heavy long via UVXY (short ETF) at 36-40 level so right now a bit underwater on those – but as I still believe this is a blow out top which can erase the gains fast again , I’m holding tight to my shorts.

Here is the script for a major top:

1. Sentiment need to be bullish and right now there is a lot of bullish sentiment in the markets – we need this because the more bullish people are , the more they are already IN the market with their positions and if we see just see some negative news – markets could go down fast again. Remember Fiscal cliff coming up , Spain full blown bailout, Greece needs money October – Troika report and so on. Sentiment is very bullish: check

2. VIX have made a bullish divergence on daily chart – this means that SPX have got a higher high , but VIX made a higher low so far which is ALWAYS near a market top, so we also got this : check

3. Dollar has been going down last months and this has helped markets going higher – I suspect that dollar is near a bottom still , hard to say exactly when but could be a bullish backtest if you lookat the weekly chart dollar, which means should bottom in this area. With QE3 news already in and dollar still holding pretty well vs an unlimited QE , I think this QE3 will backfire and not work as QE1 and QE2. But dollar is extreme oversold at those levels and ready for at least a good short term rally if not a big one. Check

4. We got bearish divergences both on daily chart but also on weekly chart suggesting this last rally up could get erased fast again – remember markets takes the stairs up and elevator down usually.

5. TLT has been down a lot and this has also helped markets higher, with TLT very oversold and back to WEEKLY MA50 support + some major horizontal supports I see is very hard for TLT to move much further down in the short term. So with TLT moving higher, supporting my thesis that markets should move down.

Conclusion: So given the above points – I think we got a script for a major top here. However I did NOT expect a move to 1475, but I saw that 1440-1450 was a possible target for a top , I exceeded my expectations. If we however look at VXX/UVXY those ETFs got nice and green again on Friday, giving me a buy signal again , so it is more than likely we start out red or go red on Monday 17th September. This will confirm a sell signal in the markets – and 1475 looks like a hard brick wall to move above. So I’m expecting this was a blow off top to stop all shorts out. I’m holding tight on my shorts (UVXY from 36-40 range) underwater little bit on them now – but as I expect SPX to go down to June lows into November elections I think it would be stupid to sell the shorts near the top.

The next leg down could very well reach 1300 or just below on SPX before another possible short term rally is due. All in all , I would prefer to stay short at those levels or add to short positions now. The rally since June 2012 looks done to me but time will tell this coming week.


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