Market Outlook

Nice drop on Friday. The market started to fall too early for me. It did not even wait for the 10 a.m. data.

However, it seems bearishness is already too high:

This is why I would not be surprised by a move back to the recent highs this week.

For my ST Trading, if conditions seem right, I will try to buy a decent drop today before the lunch, around SPX 1270.

Longer term, I am waiting for an opportunity to go short for an IT correction, but I will be selective. This is still a bull market.

GDP At A Glance

Today's GDP report was strong, consistent with a continuing expansion. The consumers are really taking over. Some positive highlights:

> the durable goods contribution to the GDP jumped a lot;

> Final Sales to Domestic Purchasers increased by 3,4 % yoy, a good rate;

> non residential structures and residential investment made positive contributions.

However, this is history. The market already knows it and I think this will become evident in the following days.

Looking into the future, it seems businesses are not very optimistic since they aggressively cut their inventories.

Trade Plan

I have a high degree of confidence that we are near a IT top so I am ready to go short. Since going short against a strong uptrend is risky whatever the context, I have two requirements that need to be met:

> a significant rally in the first part of the session. I looked in the past and previous tops happened after the market was at least 0.5% above the 7 h EMA. In our case this would mean SPX around 1305.

> a spike in the put/call ratio. This is a bit of a problem given the recent behavior of the cpc:

It is oversold despite the recent rally in the markets. This is typical behavior before a more important top, in my experience. However, usually tops do not arrive before a more significant bullish spike in the ratio. So, what I will do is check the intraday reading after the lunch and, if that represents a spike from current levels, I will consider this condition met.

This plan is highly dependent on good GDP data. I will not chase the market if it gaps down and does not rally. In this case I think that there will be another opportunity to sell next week.

A Question of Timing

I think we are very close of an intermediate term top in the market. Here is why, mainly:

> the pace of change in retail sales will slow down, usually consistent with weak future economic data and a correction in the markets :

> Gallup daily consumer confidence is at a high for some time. This preceded corrections in the past:

> breadth indicators (NYHL, % of stocks above the 50 DMA) that are diverging from the market. They usually do this and the market keeps rising but this is eventually followed by a correction.

In this context, the only problem is timing the top. For this purpose, I use put/call data and expect a turn around important economic reports:

> I think the next bullish spike on the cpc and the 5 day EMA reaching the overbought line will offer a good opportunity to sell:

The put/call ratio is very weak with the market at new highs. This is normal behavior at more important tops

The 5 day EMA of the put/call ratio will probably give a sell signal once it approaches the overbought level today or tomorrow.

> Tomorrow the Q4 GDP number is reported, a very important economic data point, one that marks inflexion points in the stock market.

A good way to minimize risk will be to wait for the market to rise significantly before an eventual short. I think this will happen at the open tomorrow after good GDP data.

St Trading for Jan 26th

The market really insisted yesterday that I cover my longs before it rallies. Very unfriendly behavior!

The recent market behavior is not a good sign however, and the higher volatility will continue after today's important announcement. Normally, I would have expected a top today but the put/call ratio is oversold:

This suggests that a more important top will be made instead around the GDP number on Friday. The market may keep rising until then since expectations for Q4 GDP are positive.

ST Trading: Out at 1279.75 ES

The market is very weak after the lunch.

Still Holding My Longs

I am ready to sell if the market weakens again:

A drop below 1282 SPX would make me give up. Otherwise, the early sell off is just the shake out I was expecting yesterday.