NYSI Working Magnificently - A Major Sell Signal

Good evening my friends.  As you may have noticed, I haven't been in much of a mood to write as of late.  I'll cut right to the chase... sometimes people can piss me I find people to be so aggravating that I get to the point when I finally just say "to hell with it, I'll just keep on doing what I do in my own office every day and just use it myself".  And for the most part that's what I've been doing for the past couple of mumfs.  [Don't ask me why I like to spell that word that way because I don't know.  It makes me chuckle I guess.]

BUT... tonight I read a comment on our friend Pretzel's site that inspired me to drop off a comment there.  The comment that jolted me out of the 'I don't feel like writing' coma was written by a great participant named 'aweedram' wherein he offered a chart that looked "very doable" to me.  I certainly appreciated his effort and his vision, BUT I also have good reason to believe that the odds of it actually developing are very, very slim.  So I left a comment on Pretzel's forum (not on his fabulous EW analysis site) in response to 'aweedram' and basically it went like this:

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BUT... I.also have to defer to several studies I have ongoing at all times. God, there are so many of them but the ones pertaining to market internals are now speaking volumes. Here's a daily chart of the Summation Index for the NYSE:

NYSI Daily - Click here for a live and updating version

What I've been watching is the negative divergence seen at the top of the recent action (red and yellow arrows). First of all, the histogram was indicating that a reversal in NYSI was imminent. What wasn't clear was whether or not the market would roll lower with it. If the market does not roll lower with NYSI, as seen in Feb. of this year, then a different form of neg. divergence is setting up between NYSI and the market itself (NYSE). In a case such as that, we know the bulls are still in charge and we'd have to wait for some form of a second rollover in NYSI that coincides with the market finally turning south. We saw that in March of this year and all that really happened at that time was that NYSI simply consolidated until the NYSE caught up with it and finally decided to tank. At that time they both keeled over and puked at the same time. Kind like me and my old drinking buddies used to do.

However, as I noted on this chart back on June 12th, if the market rolls over FIRST or COINCIDENT WITH a NYSI that has turned lower... watch out because it's the real deal. The chart is actually from this article which I had published regarding the coming bounce.  And man... did the market ever bounce.  Five ugly times to be exact.  But as demonstrated in the original publication of the chart... we have a REAL DEAL goin' on here now. And all indications are that we probably can't even expect much of a bounce until August 6th or 10th, thereabouts. Not a big bounce at least. Some readers might recall my explanation about 'why' momentum indicators do not produce a divergence at the top of a wave 2 or a wave C. Although not exactly the same, this is very similar to one of those cases. In that previous explanation I was referring to an RSI or stochastics indicator. But the 'cause' is the same in this case... tthere will be no more upward waves to cause a neg. divergence between NYSI and the NYSE.  Please don't misunderstand... that doesn't mean there won't be a bounce.  It just means that if there is a bounce, it will be a dud in that the market will not reach new highs.  But to reiterate, even so... we shouldn't see any bounce of any significance until somewhere around Aug. 8th give or take a day or three.

When I look at the futures tonight, and at all the pos. divergences on every time frame, I'm certain a bounce is coming. But according to the much more significant and reliable signals coming out of the market internals data, it's not likely going to be much of a bounce... just another great shorting opportunity. But I've learned my lessons by now... the Orcs of New York are so powerful that God only knows what they can do. My confidence has been shaken to its very core by those bastards but I'm going with what I'm seeing... this market is gonna tank big time.

I hope everyone out there is doing real well and that you're able to capitalize on the markets in the weeks ahead.  Personally I don't think there's much chance it's going to be anywhere near as choppy as it has been since early June.  Think... "more linear".

Until next time... whenever that is... stay well!
AR

Tranquility Base

NYMO - Shooting Off Its Own July 4th Fireworks

Well it's the eve of another glorious birthday for the USA and we'd like to take this opportunity to wish our American brethren our most sincere best wishes for another happy and prosperous year.  In fact we hope it's even better than the last one.  God knows, it had better be.  So over the past two weeks, perhaps in celebration of another upcoming glorious chapter in the story of the United States of America, the markets have partied like there's no tomorrow (perhaps not the best choice of words) and have run up so far, so fast that suddenly we find ourselves looking at a divergence situation in the McClellan Oscillator not seen since this very weekend of last year.  Also of note is the very intriguing fact that this same time period (between the last day of June and July 4th) has marked a very important turning point in the markets for the past 3 years running (more on that below).  This short one week period produced a low in 2009, another low in 2010 and a peak in 2011.  If this same week in 2012 is going to also mark a crucial turning point in the markets, it's pretty difficult to imagine it as being a low.

In the daily chart of NYMO below we can see how this divergence has developed:

NYMO Daily - Click here for a live and updating version

Before we begin, please note that of all the market internals indicators, some are relatively quick and 'reactive' to daily market conditions and some lag the markets by a few more days.  NYMO is one of those quicker ones... it's one of the first to issue warnings.  On the other hand, the Summation Index (a derivative of NYMO) is one of the laggards, typically reacting 3 or 4 days after a major turning point.  Not always, but usually.  Ok, so now that we're clear that today's discussion is about one of the indicators that is fairly sensitive, we begin...

Of prime interest here is the fact that at the end of June, NYMO registered the highest monthly reading of all time.  Interestingly, the last time it was up in the nosebleed section like this was in May of 2004, a full year after the market low of March 2003.  It just stands to reason that after stocks have gone through a crash such as that which occurred between Aug. 2000 and 2003, perhaps as many as 90% of all stocks had been declining.  So it's natural that once a recovery takes hold, a whole lot of those 90% of stocks that had been declining suddenly begin to rise in unison.  And of course that quickly shoots the McClellan Oscillator through the roof.  The exact same effect occurs with the much esteemed Zwieg breadth thrust indicator, but from past experience I can assure you, 95% of investors I've run into simply cannot understand how a breadth thrust can happen on a mere recovery off a severe low (which can turn out 'not' to be 'the' low).  They laugh at me.  I smile politely as I quietly relieve them of their wallet.  But I digress.

So we now have to ask the questions: "Are we seeing the markets just at the verge of cracking up and heading toward 1100?  Or are we seeing the markets on the verge of a new bull run such as that magnificent rally that began in March 2003 and lasted four and a half years?"  To tell you the truth, as far as the McClellan Oscillator is concerned, it really could be either.

So we zoom out a bit and take a look at the weekly chart of NYMO below:

NYMO Weekly - Click here for a live and updating version, complete with a few more indicators

At the end of June, the McClellan Oscillator closed the month at the highest reading of all time (on a monthly basis).  On a weekly basis, and even as of this evening, NYMO is currently sitting at the second highest reading of all time.  Looking at both charts above, in consideration of where the McClellan Oscillator currently resides, the only thing we know with 100% certainty is that the market is going to be headed south at any moment.  Perhaps it will begin with the market open on Thursday.  Perhaps the rally can even last as long as to finish out the week a bit higher.  But it's going to pull back.  If you're long... get out because the potential for downside risk dwarfs any reward you could possibly gain over the coming weeks.  You got your 8% in six days... now take it off the table.  This is a conclusion that's not even open for debate.  C'mon investors, the markets have just put in a magnificent 8% rally in 6 days, closing on the one week window that has marked a major turning point in 1998, 1999, 2003, 2006, 2007, 2009, 2010 and 2011.  True enough, not all of them were tops.  But if a turn is going to happen during this same week of this year, I can tell you this year it ain't going to be a low.  The question that is still open for debate is how far that pullback is going to go.  That part I don't pretend to know.  All I'm very comfortable with is that the market internals are sending a signal that basically says "enough already" and that we'd best be prepared for the inevitable... and that being "no bulls, you're not going to get another 8% over the next 6 days."

Every once in a while we hit the end of the road

And finally, the divergence that has developed is not a bearish divergence but a negative divergence.  They are not the same thing.  The bearish divergence, one in which the index makes a new high but it's indicators do not, does not offer measurable targets.  The one we're looking at today is a negative divergence, one which 'does' offer a measured move possibility.  In these cases, the indicators make a new high but the index does not.  With the negative divergence set-up that we're faced with currently, we're looking at a measured move to 6234 on the NYSE (NYA) and 1118 on the S&P 500.  I wish I could offer a money back guarantee that these targets are going to be hit.  But considering that we're now living in a matrix where the central banks of the world just keep pulling one green rabbit after the other out of their greasy asses, who in heck knows for sure whether or not these divergences and the message they deliver will be obeyed this time around?  If there were no such thing as central bankers I'd offer that money back guarantee.  Mind you, if there were no such thing as central bankers the Dow never would have gotten over 1000 in the first place.  So stay tuned... the potential for a big decline does indeed exist despite the stink of euphoria permeating the planet's otherwise breathable atmosphere.

Wishing all of you nothing but success going forward... and a beautiful and happy summer.

Until next time....

END OF ORIGINAL POST

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UPDATE: July 4th, 2012

Papa_Boule has made reference to a couple of great 'broad measures', the GDOW and VEU (the ETF that includes everything BUT the US indexes).  In the interest of providing a 'visual' for our discussion, I've added a daily version of GDOW below:

GDOW Daily - Click here for a live and updating version

NYSI Adds Fuel To The Argument For A Bounce

After today's strong action, action which will surely make bears think "this has been a corrective wave that's now finished", the market internals data continues to strengthen, adding to the argument for perhaps more upside than most are envisioning.  Please don't misunderstand, I'm still as bearish as ever but have come to appreciate the wisdom in "just forgetting what I know" and focusing on "what I see".

And what we're seeing today, augmenting the signal from the weekly NYMO which I detailed here, is more strength as it has become apparent that the NYSI (a derivative of NYMO which tends to lag by a day or three) is now issuing a buy signal as well.  I know, I know... how could a person possibly see anything bullish in today's market?  Especially someone like yours truly who has been afflicted with the disease known as "bearish bias" since the 1970s?    But it is what it is.  I'm just reporting what I'm seeing here friends and what I'm seeing is that deep inside the market, hidden from normal view, there are more stocks willing to participate in upside than there were last week.  That's not to say that the market internals "aren't weak"... they are.  But they are also at levels where market lows often occur.  And they are improving... faster with each day.

Normally my nose isn't this red.  Pressure... you know?

I don't want to speculate on what is giving the market this strength.  I don't want to know whether or not it's a short squeeze, a squeeze that could possibly get much more excruciating overnight.  I don't particularly care any more whether or not it's another deliberate 'goose job'.  A ramp job that put the market into a condition where bears will surely recognize the potential for a beautiful looking H&S pattern that 'must surely fail because it's textbook'.  I can certainly see that potential H&S as well.  It's a beauty alright, but until any H&S is actually completed with the breaking of the neckline, it's just that... pure conjecture.  Fortunately, of all the pattern 'traps' that are possible, that is one I've never been caught by for the simple reason that for some reason or other I've always been overtly aware of how often a potential H&S just seems to vanish into the waves as time progresses.

Today I'd like to show the daily chart of the Summation Index for the NYSE.  Just as a matter of explanation, NYSI is actually derived from the McClellan Oscillator.  To plagiarize the excellent description as detailed by StockCharts, the "McClellan Summation Index is a breadth indicator derived the McClellan Oscillator, which is a breadth indicator based on Net Advances (advancing issues less declining issues). The Summation Index is simply a running total of the McClellan Oscillator values. Even though it is called a Summation Index, the indicator is really an oscillator that fluctuates above/below zero. As such, signals can be derived from bullish/bearish divergences, directional movement and center line crossovers".

NYSI Daily - Click here for a full blown version that includes several indicators not visible in the version above.

To add to the evidence, let's also revisit that signal which we alluded to in Sunday's post, "NYMO Weekly Issues Buy Signal".

NYMO Weekly - Click here for a full blown version

So the evidence mounts that the market appears to be gaining some internal strength.  In no way does that imply "how much" strength though, nor how far it intends to climb.  I think it's just a simple matter of the market perhaps having fallen "too far, too fast".  And from that perspective a bounce is absolutely warranted.  Nobody should be surprised by it nor particularly angry about it.  I don't pretend to know how far it will bounce but suffice it to say that according to Elliott Wave rules, this bounce could indeed retrace the entire decline off the April 2nd high.  In no way would I suggest that's what's in the cards though.  In fact, my personal gut feel is that a retracement of perhaps 61.8% would be perfectly normal.  That would take the S&P back up to the range of 1360-65 and that's exactly what I think would make the most sense since solid resistance resides right in that area.

First though, we need to see if the markets actually do what these indicators are suggesting they will do... rise!  I think this evening's overnight action on the futures markets could end up being one of the more important sessions in this entire month.

CONCLUSION: The market is showing that it wants to rise.  In the event that's what happens, what we must then quickly get focused on would be a reversal of the signals discussed above.  Because if these indicators at some point start to warn of a pending top, and that top is going to be lower than the April high (which it surely will I would have to think), the bears are most likely going to get one of the best entry points they're likely to see in a year of trading.  There will be others, but the one I'm referring to is one we don't want to miss out on.  Stay tuned, it seems the market action just might be developing quite logically.  What a nice change of pace that would be.

Wishing you all the best...
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UPDATE: Thursday, June 14, 2012

Just for the heck of it I thought I'd throw this chart out there.  Normally when we see a chart like this our first inclination would be to give an honest assessment of what we think the next move is.  It's an especially effective exercise when we don't know what the stock, commodity or product is.  I've drawn in my own opinion about where it's heading next but please don't let that affect your own vision because I'm just making an educated guess like anyone else.  Where would you say this pattern is going next? 

Click here for a live and updating version

......

NYMO Weekly Issues Buy Signal

Market internals have recently been showing signs of bottoming which would of course imply a bounce of some sort. However, until the improvement in those market internals showed a bit more 'conviction', their signal had not been convincing enough for my liking.  Nonetheless, once they became more developed it became apparent that it's entirely possible, considering that they're emerging from levels where bottoms often occur, that they are signaling more than just a small bounce.  At this early stage the size of the coming move higher is difficult to ascertain but it seems that something significant could be in the works.  From this point forward we'd defer to other methods of measurement to try to get a sense about the power and duration behind this 'bounce'.

But one thing I was waiting for in some of the market internals charts is a positive divergence because until we see one, my own personal conviction in the reliability of the market internals charts was relatively low.  But with the close on Friday we got confirmation of a positive divergence on a weekly chart of the McClellan Oscillator.  This is a very reliable signal and for the first time in quite a while I'm pretty comfortable with long positions initiated earlier in the week, particularly the smaller caps (RUT).  It's still hard to say whether or not it would be wise to start to add to them though, given the schizophrenia that keeps emerging out of Europe.  In any case, here is a weekly chart of NYMO with the NYSE shown in a panel above:

Click here for a full blown version

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Russell Is A Tattletale

UPDATED: JUNE 8, 2012

Well whataya know?  For the first time in a long while I can finally stick my neck out there and say that I can see a bullish looking chart that even I can buy into.  Me, the one person who is tormented above all others with a bearish bias so powerful that I can't even read my own TA work properly half the time.  Well in fairness I should probably say that "I can read it alright, but I can't believe that what I'm seeing is even possible sometimes".  As difficult as it is to completely ignore the fact (at least for me personally) that Europe is on the verge of a complete meltdown, the global power brokers seem to be up to their old tricks and just might be able to temporarily reflate the equities markets one more time.  Of course the entire world realizes that it will just be another in a long list of failed attempts to stop the motor in the torpedo that's well on its way, but for now it looks like they just might be able to stall the big hit for a wee bit longer.  "We hope to have video on the torpedo attack later in the news hour.  And now... back to our regularly scheduled programming..."

How does somewhere in the first two weeks of August for a top sound to you? I'll show you where that time frame comes from in a moment.  For now, let's start off by looking at a 60 minute chart of the Russell 2000:

RUT 60 min - Click here for a live and updating version.  For those not subscribed to StockCharts... here's the print version so you can see the annotations.

Talk about not seeing the forest for the fish

I want to start off with the 60 minute chart (above) because it's on that chart where I finally had the epiphany I was looking for.  Why didn't I see this sooner?  In retrospect, I can say that Pretzel had pointed out that the first wave down off the high (yellow wave 1 in the chart above) has bothered him from the beginning because it looks like a 3 wave structure when others counted it as a fiver.  In fairness to all, it can be counted either way.  But to my eye, it's a 3 wave structure and even though I had read Pretzel's admonition it didn't really sink in.  Until now!  Because dang it all, not only is that first wave a 3 wave structure... all five yellow waves above are 3 wave structures.  The whole thing appears to be a leading diagonal (without the required overlap)!  Is such a structure legitimate in EW Theory?  I don't think so, but darn it all each and every one of those waves is a 3 wave structure and even though the overlap between waves 1 and 4 did not occur, that's still a motive wave.  That's my story and I'm sticking to it. An embarrassingly late light bulb moment.  The only caveat I'll throw in here is that in these wee hours of the morning I'm not totally convinced that the fifth and final 3-wave leg lower is complete.  For one thing, the ideal target for the H&S has not yet been met.  Although it doesn't have to be met, it usually is.  A bit of a conundrum.  We'll have to see how the market reacts to a huge gap higher this morning (Wednesday morning).  If it's going to pull back and get started on that final push lower to complete that last 3 wave, we'll likely see it begin quite quickly.

["I also want to briefly discuss another pattern that's been knocking around in my skull for a while.  I have always been bothered by the form of the decline that started at the end of March.  Readers will recall me mentioning the RUT in comparison to the SPX on numerous occasions, and discussing how the RUT didn't quite reconcile as a five-wave decline."]  Pretzel Logic, Tuesday, May 29th

So although Pretzel wasn't entirely sure, at least he identified the possibility above.  Cudos to Pretzel!  I certainly did not discount his warning, but nether did I pay enough attention to it.  But wait a minute... I'm not going to beat myself up about this.  In fact, I'll answer my own question.  I failed to recognize that the entire decline from the end of March was a diagonal because just like almost every other Elliott Wave practitioner out there, we're fixated on identifying 5 wave structures.  And we do that because 5 wave structures represent the hallmark of EW theory... a motive wave... an impulse.  It's by identifying 5 wave thrusts that Elliotticians navigate in extremely difficult-to-chart waters.  So by focusing so mightily on identifying fivers, I like most other technicians, too often fail to see a 3 wave structure when it's right there staring us in the face.  Even after Pretzel (correctly) identifies one that he envisions to possibly be a 3 wave sequence, lol.  But for me to miss 5 of them in a row?  I'm going to blame that on the failure of waves 1 and 4 to overlap.  No doubt that threw not only myself off the trail, but must have surely thrown even the best EW specialists off the scent as well.  We have a normal (but probably unhealthy) tendency to insist on seeing fivers when they may not even exist at all.  Nonetheless, I think I'll just slip under this rock now if you don't mind.  But alas... it's early in the game and nothing is lost.  In fact I think new vision is found.

Admittedly, the 60 minute chart above is a wee bit crammed but I wanted to display it so that you could see for yourself that even though yellow waves 1 and 4 do not overlap, the entire sequence of 5 waves is nonetheless made up of five 3 wave pieces. To me that's good enough.  It's a motive wave lower... and it's finished (or very nearly so).  So where does it go from here?  Let's continue by taking a quick step backward in time and looking at this weekly chart as presented on May 2nd:

Click here for a live and updating version.  We'll know real soon whether or not these targets are nothing more than whimsy or a little more real than that.  For now at least, it's just a bit too interesting to dismiss outright.

Although the analysis I'm presenting today appears to be in defiance of that shown in the May 2 piece on Exponential Decay, we can still use the cyclical portion of that study as shown in the chart above.  As you can see, the yellow cycle dates are still as valid today as they were a month ago.  They still indicate that an important turning point in the markets should occur in the first week of August.  As I'd mentioned in the previously-referred-to article, we can't necessarily tell by looking at a cycle study whether it's identifying a market 'high' for the first week of August... or a market 'low'.  5 weeks ago I thought early August would mark a low.  Today I believe it is in fact pinpointing a market peak.  Because not only is the Russell revealing what appears to be a completed (or nearly completed) 5 wave sequence lower, the market internals data are now beginning to reveal several positive divergences that suggest that they are more than willing cooperate with a sizable bounce in equities.  So to the best of my knowledge, other than the fact that Rome is almost burning, all the ducks seem to be lined up for the markets to march higher.  One more final thrust lower notwithstanding.  Those freakin' bankers are just magical wizard bastards, are they not?

How high do the markets bounce?  Let's take a look at the daily chart of the Russell:

$RUT Daily - Click here for a live and updating version

Let's assume for the moment that the conclusion I've drawn is correct.  If the market were to begin to blast off from here, the very minimum move we should expect would be that the upper trend line in the chart above be broken.  More likely though, the neckline of the Head and Shoulders pattern is most likely the target.  Personally, I doubt very much that that level will be exceeded.  (I need to qualify that by pointing out that the Russell is likely to stall at the neckline and reverse from there, but not necessarily the S&P.)  But it's possible that the Russel could exceed the neckline as well, since EWT would allow for the entirety of the move down off the March high to be retraced.  Possible, but extremely unlikely in my opinion.

On that note then, I need to mention a recent call by our friend Pebblewriter.  I think most of you probably know who Pebble is but if not, he's a terrific technician who's expertise is in the field of Gartley Patterns.  I don't know all that much about that field of study but Pebble has been kind enough to point out a couple of the nuances to me.  I'm not good enough at (not nearly good enough) to quote any of it but I do know that Pebble eats a lot of butterflies and crabs.  I'm not sure if that's a prerequisite to understanding what he knows but I ate a butterfly on Saturday and nothing happened.  So I defer to Pebblewriter's expertise which led him to drop the following comment on the last post on this blog only two days ago (Monday, June 5th).

["Haven't quite reached a conclusion yet on a "new high", but the bounce should be substantial."] Pebblewriter, Monday June 5th, when calling that a low was in.

In other words, it appears that Pebblewriter absolutely nailed the low. Even if there were to be one more thrust lower, his analysis would still be within a few days and judging by the size of the bounce that he has measured, it would be one heck of a great call.  So friends, if you'd care to see more guidance about the potential for the size of this next bounce, Pebblewriter's blog offers a completely different (and often very accurate) way of looking at things.  In his recent article entitled "SPX: The View from 30.000 Feet", Pebble gives a potential target that is surprisingly high... much higher than just a test of the neckline that I'm envisioning.  But not for one second would I discount his vision.  He's been far too accurate to dismiss.  Not to mention that like many of the other bloggers that I've gotten to know, he's one of the nicest guys you could ever hope to meet up with.  So is Pretzel... and at 6'4", I'm kinda glad Pretzel is one of the 'good guys' too.

Ok, back to the daily chart above.  Notice the bright yellow band on the right side of the chart.  That band is identifying the potential cyclical turning dates discovered in the analysis on Exponential Decay.  As faulty as that study may or may not have been, at least the cycle dates that it identified are still perfectly valid.  One caveat I'd like to throw into the mix here:  In each of the past 3 years, an important market turning point has occurred on (or very near to) July 1st.  A low in 2009, another low in 2010 and a peak in 2011.  Just food for thought and it's very important that we keep that in mind as we near the end of June this year.

At this point I had planned on inserting some charts that show how the market internals data is now set up to staunchly support a bounce in equities.  But that can wait until later this week and I will do just that... add some charts as those indicators (lagging indicators) begin to make the turns higher that I'm almost certain are coming.  Those turns higher will be visible later this week and I'll add some of those charts at that time.  So please feel free to bookmark this page and come back in a day or two for the updates.

Oh... news flash!  Just as a reminder... that torpedo is still on its way and it is absolutely, 100% guaranteed... unstoppable.  Delay-able?  Absolutely... but not for much longer.  When it hits we're going to understand all too clearly, the meaning of "that sinking feeling".

Wishing each and almost every one of you the very best.  Until next time...

END OF ORIGINAL ARTICLE.  UPDATES TO FOLLOW:

Here is the first chart that we should take into consideration after a terrific rally on The Strip Wall Street.  Much has happened, and very quickly, since this article was first published... only 15 short hours ago.  Here's another look at the 60 min. chart of the Russell:

RUT 60 min - Click here for a live and updating version.  For those not subscribed to StockCharts... here's the print version so you can see the annotations.

Well!  As they say at Quicky's Cat House Express: "This won't take long, did it?"  As mentioned in the main article above, the first order of the day would be for the indexes to break though their down-sloping resistance trend lines.  They did that today with a flourish.  Not only did they break out, but the rally was very broadly based with participation from all sectors and with very meaningful improvements in the horrid conditions of the market internals.  In other words, this rally is very powerful.  In reality, that doesn't necessarily equate to "long lasting".  Nor does it mean the market is off toward new highs, although that too is possible.  That aspect of it remains to be seen because let's face it... Bernanke could very easily slip a turd into this punchbowl.

So in spite of the beautiful breadth of today's rally, it's still entirely possible that it's still just a natural reaction off a very dismal market internals situation.  It could just as easily be powerful people taking advantage of a wonderful opportunity to offload their bags of toxic poo.  I know that sounds like my inherent bearish bias is acting up again... but what I say is not untrue.  It's very true!  These improvements in the market internals data could fizzle in a heartbeat and Ben controls that aspect... period.  But in order to alleviate the pain my words will surely cause in the ears of those who are bullish, I will say this... if Bernanke says all the right things, I go as bullish as everybody else.  Unfortunately, it depends entirely on what he announces... or fails to announce.  Isn't that a sad state of affairs? 

So what next?  As you may have already surmised I like to focus on the Russell, mainly because it's a leader.  It tends to telegraph the moves in the S&P in both directions because it better reflects the actions of those who take bigger risks... the big boys.  So now that the Russell has broken out, the next logical point of interest is unquestionably the level where the previous big H&S pattern's neckline intersects.  That level is identified on the chart above and it resides in the area of 777 on the Russell.  On the S&P it's not nearly as clear but in my estimation an equivalent would be the area between 1335-1340.  I don't think there any chance whatsoever that the Russell won't hit that line at the very least.  However, I really doubt that it can make it all the way in one fell swoop.  I know, I know, the mood out there has suddenly turned uber-bullish.  Rumor and jaw-boning by the likes of Janet Screamin tend to have that effect.  But we have to be very realistic now, until Ben the Benevolent actually announces something monumental, it's just that... rumor and conjecture.

Nonetheless, we have to put all that speculation aside and focus on what happens tomorrow when Mr. Bernanke actually puts on the performance.  Perhaps the performance of a lifetime because wow... that one is a biggie.  In a nutshell, here's what I think is absolutely critical... that neckline.  Either it is going to be surpassed or it isn't.  And that's it.  There's no point in speculating on whether or not that happens, but there's definitely reason to examine each case.

I doubt very much that the neckline will be tested in one straight charge and think it's more than reasonable to expect the pullback as shown on the chart above,  BUT, if the neckline is tested and offers insurmountable resistance, we're going to see the Russell react first and probably very violently to the downside.  Thankfully, more often that not, the re-test of a H&S neckline as beautiful as that one isn't usually a long drawn out affair.  We should know fairly quickly.  In other words, I highly doubt the markets are going to fool around there, knocking on the door 4 or 5 times.  The world is just too damned edgy for that kind of messing around these days.

On the other hand, it is definitely possible that the neckline fails to hold the Russell back.  In that case, it's a whole new ballgame and the minimum upside targets then become measurable and substantial, with 828 on the Russell seen as a minimum.

Up next, we take a look at one measure of internal market strength, the NYSE Summation Index (NYSI).  Summation Index is a breadth indicator derived the McClellan Oscillator, which is a breadth indicator based on Net Advances (advancing issues less declining issues). The Summation Index is simply a running total of the McClellan Oscillator values. Even though it is called a Summation Index, the indicator is really an oscillator that fluctuates above/below zero. As such, signals can be derived from bullish/bearish divergences, directional movement and center line crossovers:

$NYSI Daily - Click here for a live and updating version.

Some of the finest signals issued by the Summation Index are based on divergences.  As well, the actual numerical value is relatively important, especially the zero line and the extremes.  On the topic of the extremes, at this point the Summation Index is not particularly oversold by any stretch of the imagination.  At MAJOR lows like the 2009 bottom it was much, much deeper.  However it is currently sitting in a position where 'every day run-of-the-mill market lows' often occur.  And perhaps most importantly, based on signals from its RSI, it is definitely about to turn higher.  That's a bullish sign "for the NYSI itself".  However, there is one aspect that I find to be somewhat troubling...

And that is in regard to the fact that the Summation Indexes almost always provide a very reliable divergence at major turning points.  Witness the last 3 very important market bottoms; March 2009, June of 2010 and August of 2011.  In all 3 cases the market had suffered a substantial decline, the smallest of which was in the summer of 2010 and which represented a drop of 17.9%.  By comparison, the recent sell-off in the NYSE over the past 11 weeks was only 13.3%.  So does the recent decline qualify as a major bottom?  Perhaps not since in truth it might be just another 'run-of-the-mill market low'.  It is equally possible though that perhaps there is more downside to come.  I hate to sound negative but the lack of divergence dictates that this possibility is very real. 

Nonetheless the recent decline was a significant enough event that it brought the NYSI down to a level where market lows are often found.  So where is that positive divergence?  It raises the prospect that perhaps it is yet to come because it is expected although not absolutely mandatory.  On the other hand, and this is a very noteworthy observation, although the NYSI has reached a level which is approximately equivalent to its level attained at the low of the previous (and scary) decline in the summer of last year, the stock markets actually have not.  That fact alone can legitimately be interpreted as a very bullish signal for equities. So once again, as is so often the case, we find ourselves looking at a very valuable market indicator and it's flashing mixed signals.

So in order not to leave you thinking "well that was barely worth reading", let me summarize it with these interpretations:  The positive divergence is not absolutely mandatory although its absence is concerning.  Other than that little "glitch", the Summation Index is definitely going to turn higher.  That fact is flat out positive for the equities markets since it suggests they will turn higher as well.  And the final clue (which I believe is the most positive aspect of all) is the fact that while NYSI is now at the same depth (close enough) as it was at the last major low, equities themselves are not.  OVERALL... other than the missing positive divergence, these should be deemed as very bullish developments until and unless proven otherwise.

UPDATE: JUNE 8, 2012

The markets are going to finish off the week having put in very green "bullish engulfing" candles.   This is an extremely bullish signal, especially when the market internals are all at low levels and turning higher, as they are now.  [Please ignore the annotations on the chart below... they were written quite some time ago in a fit of cynicism and attempted humor.  I was showing how some wave analysts will count that yellow wave down and call it a 3 wave sequence.]

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