What is wrong with the picture above is that internals are crumbling even as SPX makes new highs. Looking at the charts below it can be seen that Friday's close was the second time this Summer that SPX and the DJIA have closed at new highs while the NYSE advance-decline line (ADL) has failed to set a confirming new high. The first such day was exactly one week earlier, the preceding Friday. Additionally, as SPX closed at new highs, NYMO was just barely positive at just +4.38, down from over +100 last month and NAMO was negative at -2.68, COMPQ failed to set a new high, the 10-day average of net advances was just 0.521 compared to 0.64 last month at a much lower SPX, and $RUT is about 4% lower than the level it hit on July 3 when SPX closed under 1370. That's what's wrong with this picture.
Studying the charts above carefully, one can see the Seven Sentinels Buy Signal of June 8, 2012 and then the point where we exited all positions for the tracking account and have stayed out since- which was on July 20, one day after the all time peak in the ADL. Notice what has occurred since. Again, as detailed above, the ADL has never returned to it's July 19 level, NAMO and NYMO have collapsed, the 10-day net advances have weakened from 0.64 to 0.52, $Compq has never returned to its July 19 level, and $RUT is down a substantial 4% since July 19. Despite marginal new highs on SPX and the DJIA, this has been a good time (the "right time" in our opinion) to be OUT of positions entirely. During that time, though, we've traded aggressively and highly successfully for short term accounts using our HTT short term trend indicator.
So what now? What do we see ahead after Friday's new high close on SPX and the DJIA? In a phrase: "more of the same" leading up shortly to a Seven Sentinels Sell Signal and renewed intermediate Term decline. The question we all have is "when"? Is it possible that the market will get caught up in a "short squeeze" that will take it much farther than we had imagined? Absolutely. Is it possible than within the next day or two we will see the Seven Sentinels Sell Signal which we've awaited as we've sat this market out for position accounts? That, too, is a very real possibility. So which is it? The fact is: we don't know. Either outcome is possible and plausible. We've been trading markets for over 40 years and have seen both incomes under these circumstances- many times each. But the market knows and the market will tell us- via our signals. And we will trade accordingly.
Chilidawgz published this supurb list of 50 trading rules this weekend. We've spent a lifetime studying the habits of very successful traders and note that every winning trader we've studied uses rules or has formed habits that approximate this list. And of those 50 rules, this one applies to what we just said in the prior paragraph:
46. In the world of money, which is a world shaped by human behavior, nobody has the foggiest notion of what will happen in the future. Mark that word â€ Nobody! Thus the successful trader does not base moves on what supposedly will happen but reacts instead to what does happen.
What we can say is this: while the Intermediate Term picture is one of dangerously weakining internals, and one where segments of the market already may have peaked in mid-July, and where a substantial IT decline lies ahead....the fact remains that for the moment ALL trends are up: Long Term, Intermediate Term (via SS) and Short Term (via HTT's). This in NOT a "buy and hold" market environment. We continue to stay in 100% cash for position accounts, and to trade long by "buying the dips, selling the rips" for active trading accounts..