1294 - The Top

Yesterday, the S&P 500 Index closed @ 1295, one point above 1294.
Today, the market behaved as if the trend has changed to the down side.

Q: Why do I say that? First, the bull flag pattern has worked very well during this rally since December 1. The market would correct and then rally higher. But the corrections were always higher than the previous correction. This morning, I was observing the cash futures for the S&P 500. Another bull flag formed at about midnight with a low of 1290. If the uptrend had still remained in play, then the market should have bounced off of 1290 today. Instead, the market dropped through support @1290. This little behavior told me that the character of the market had changed. Second, there was support from Friday @ 1287. The market dropped through this support as well. Third, yesterday was a narrow range 7 day. In other words, Tuesday was the narrowest range day out of the previous seven days. Normally, a price expansion follows a narrow range 7 day. So, the market's behavior of ranging widely was to be expected following a narrow range day. Fourth, the 2011 Stock Almanac warned that this week in January stood a high probability of producing losses in the market. Finally, the market stopped right @ support @ 1278 before closing @ 1281.

Taken together, all of these events told me that the trend had changed early this morning before the market opened

So, if 1295 was the absolute top of this move from the July 1, 2010 bottom of 1010, what should happen next? This week should be a down week. Levels of support are @ 1278, 1259, 1242, 1225, 1207, 1191, and 1173. These support levels are key because they mean that buying pressure will come to slow the market's drop before the down trend renews itself. Notice how we go back in time when the trend has changed to down. Unfortunately, many longs will try to convince themselves that the market is still advancing higher. They will continue to buy the dips in the market because that strategy has worked since December 1.

However, the character of the market has now changed. I am 100% in the G Fund and have been since 1240. We should see 1240 again real soon. Now is a good time to sell, although yesterday and last week were better times.

Looking ahead, the next stop is 1259. I would not be surprised if the market made a low @ 1259 tomorrow. Notice how the bullish sentiment will begin to change over the coming days.

Did we have a true selling day today? Yes, we did. Remember that true selling days occur when at least three indexes drop by 1% or more. This rough rule of thumb separates dips to be bought (buying opportunity)from times to sell and get out. The following indexes were down by more than 1% today at the close: Nasdaq, 1.46%; NYSE, 1.05%; S&P 500 Index, 1.01%; NDX, 1.09%; Russell 2000, 2.56%. Yes, today was a true selling day.

I don't know how long it will take for this correction to play itself out. We could either see three or five waves down. I am waiting for the 1173 zone as a good buying opportunity. By buying at this level, I can ensure that we buy low and are in a good position to outperform the S&P 500 Index this year.

I did not blog on the market yesterday because I was home sick with a bad cold.

In a month, it will be nice to look back and say that the 1294 zone was the top and that we nailed it. We just have to see what develops. I remain biased towards May as a good buy time for 2011.

Thought for the Day: "First acquire patience and perseverance, then make up your mind what else you want, and you will be almost sure to get it." --Napoleon Hill, The Law of Success in Sixteen Lessons (Volume 2), page 122

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