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This Bullish Chart is Bearish for the Market

By Jeff Clark
Tuesday, May 20, 2008

The amazing nine-week, 100-point rally we've seen in the S&P 500 is about to come to an end.
 
Of course, it's hard to say for sure the market has peaked. But enough technical indicators are flashing warning signs that it makes sense for traders to be a bit cautious...
 
Shares of Merrill Lynch are underperforming. Investor sentiment is as positive as it's been all year. The put/call ratio is falling. And the talking heads on CNBC are once again registering high on the "giddiness" scale.
 
And then, there's this chart...
 
 
This is a chart of the Volatility Index. It's a measure of the premium investors are willing to pay to purchase options on the S&P 500.
 
A rising VIX indicates investors are growing more fearful of a potential downside move and are willing to pay up to buy protection via index puts. A declining VIX displays increasing investor complacency.
 
The VIX is best used as a contrary indicator. Indeed, the stock market often bottoms just as the VIX peaks, and vice versa. In other words: "When the VIX is high, it's time to buy. When the VIX is low, it's time to go."
 
Yesterday, the VIX closed at the lowest level of 2008. Worse yet, you can see the chart is tracing out a bullish falling-wedge formation. These patterns typically break out to the upside. And that spells trouble for the stock market over the short term.
 
No single technical indicator is correct all of the time. And it's foolish to move all in or all out solely on the basis of technical analysis. But I think these warning signs justify a bit of caution right now.
 
Best regards and good trading,
 
Jeff Clark





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Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%