Each weekend, I study market behavior using sentiment and technical indicators. The goal is to use clues, observation, and indicators to determine if we are in a bullish, bearish, or sideways market environment.

RELEASED: Understanding Options (McGraw-Hill, 2E), Understanding Stocks (McGraw-Hill, 2E), Start Day Trading Now (Adams Media), and Predict the Next Bull or Bear Market and Win (Adams Media): http://bit.ly/1bl0ZNk

My latest MarketWatch column: http://goo.gl/pjQUxV

AAII survey (11/26/2014)

52.1% Bullish. 20.8% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

Investors Intelligence (11/25/2014)

55.4% Bullish. 14.8% Bearish

Bearish: If sentiment is over 60% bullish. ( Note: Percent of bears is at historic lows. 13.3 % is the 1987 low)

Bullish: If sentiment is over 60% bearish.

VIX: 13.33 (on 11/28/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

RSI (S&P 500): RSI is at 70.69 (on 11/28/2014) NOTE: RSI of Dow is at 75.39.

Overbought (i.e. Bearish): When RSI rises to 70 or above.

Oversold (i.e. Bullish): When RSI falls to 30 or below.

Note: RSI can remain overbought or oversold for extended time periods.

Moving Averages (daily): The S&P is above its 50-day, 100-day, and 200-day moving averages and pointing up. 

Bearish (Short-term Downtrend): Index crosses below 50-, 100-, or 200-day MA.

Bullish (Short-term Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

MACD (S&P 500): MACD is above its zero line, and above its red 9-day signal line and pointing up. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

Bearish: MACD line crosses below 9-day (red or gray) signal line. MACD line (black line) crosses below zero line.

Bullish: MACD line crosses above 9-day signal line. MACD line crosses above zero line.

Bonds: U.S. 10-year yield is at 2.19% (on 11/28/2014) NOTE: Bonds are rallying.

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

Analysis: Sentiment indicators continue to spike higher, which is a bearish signal. AAII is above 50% and the number of bears in Investors Intelligence has reached historic lows. In addition, VIX remains in the basement, and RSI is above 70 (and 75 on the Dow). When you put it all together, you have excessive bullishness. Only a handful of investors expect the market to fall this month. Another unusual development is the smashing of commodities, especially oil. It is unknown at this time how this will affect the stock market. The good news: If you follow the trend, you are all in. The trend is up, moving averages are flashing green, and MACD is positive. Once again, it’s the sentiment indicators vs the technicals. We should know the winner soon.

Opinion: It’s been a long time since I’ve seen the sentiment indicators so skewed in one direction (up). Most investors are certain that December will be good to the market, and we’ll have that Christmas rally. After the “Bullard Bounce” last month, the market has been on a tear. To the unknowledgeable, this appears to be a raging bull market. The sweetener is the Fed, which is willing and ready to interject itself into the market when it falls. As I write this today, many people believe that the powers that be will not let this market go down.

If you study market history, whenever people believe “the market will never go down,” the market does, and abruptly. Right now, bullish investors are dreaming of Dow 18,000, and they might get it…or not. I know from experience whenever the herd believes they are fully protected, they’re really not.

Sometimes it takes a while, which is why my latest MarketWatch article (http://goo.gl/pjQUxV) is about being patient and waiting for the right opportunity. I don’t believe that it’s “different this time.” By this, I mean that no one has the power to prevent the market from falling indefinitely. The day will come (and I believe sooner rather than later) when the Fed’s words will be ignored and the market will plunge by more than anyone can imagine.

I’m not saying this will happen this week, or even next. I do know that the market is even more dangerous than six months ago (when I first started warning investors). The facts are these: The market keeps going higher while the rest of the world is struggling, while commodities are getting smashed, while bonds are rallying, while sentiment is at an all-time high, and while market breadth is terrible (i.e. New High-New Low and NYSE Tick).

When I look at reality, and then at the sentiment numbers, I am more convinced than ever this market is vulnerable. I believe the odds are very good that December will be a volatile month. Almost no one believes it.

At the moment, the market is trading in a very tight range, which will end in one of two ways. After consolidating, it will go higher. Or second, it will keep churning but go nowhere, eventually plunging faster and farther than anyone can imagine. That would be the scenario that absolutely no one is thinking of right now.

Bottom line: Sit tight and let the market have the final word. Be ready to pounce when the time is right.

Each weekend, I study market behavior using sentiment and technical indicators. The goal is to use clues, observation, and indicators to determine if we are in a bullish, bearish, or sideways market environment.

RELEASED: Understanding Options (McGraw-Hill, 2E), Understanding Stocks (McGraw-Hill, 2E), Start Day Trading Now (Adams Media), and Predict the Next Bull or Bear Market and Win (Adams Media): http://bit.ly/1bl0ZNk

Remember: The stock market is closed on Thanksgiving (November 27). 

AAII survey (11/19/2014)

49.1% Bullish. 23.8% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

Investors Intelligence (11/18/2014)

56.4% Bullish. 14.9% Bearish

Bearish: If sentiment is over 60% bullish. ( Note: Percent of bears is at historic lows. 13.3 % is the 1987 low)

Bullish: If sentiment is over 60% bearish.

VIX: 12.90 (on 11/21/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

RSI (S&P 500): RSI is at 73.23 (on 11/21/2014)

Overbought (i.e. Bearish): When RSI rises to 70 or above.

Oversold (i.e. Bullish): When RSI falls to 30 or below.

Note: RSI can remain overbought or oversold for extended time periods.

Moving Averages (daily): The S&P is above its 50-day, 100-day, and 200-day moving averages and pointing up. 

Bearish (Short-term Downtrend): Index crosses below 50-, 100-, or 200-day MA.

Bullish (Short-term Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

MACD (S&P 500): MACD is above its zero line, and above its red 9-day signal line and pointing up. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

Bearish: MACD line crosses below 9-day (red or gray) signal line. MACD line (black line) crosses below zero line.

Bullish: MACD line crosses above 9-day signal line. MACD line crosses above zero line.

Bonds: U.S. 10-year yield is at 2.31% (on 11/21/2014)

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

Analysis: The sentiment indicators are at historic levels, including the AAII and II surveys, RSI, and VIX. As you can see above, there are very few bears left, a very negative sign. In the past, at market tops such as 1987, 2000, and 2007, these are the kind of sentiment numbers you will see. This doesn’t mean there will be an immediate correction because sentiment can get even more extreme. However, it does mean that this a glaring red flag. On the technical side, the market was flat all week until China announced they were lowering interest rates, and the Dow zoomed higher by 170 points. It lost almost half of its gains by the end of the day. Bottom line: The market keeps climbing higher but gets more dangerous each day.

Opinion: Since I’ve been doing this blog, I have never seen the sentiment indicators turn so bullish, which is a huge warning. When too many people believe the market will never go down, when most bears have disappeared, when bullish investors feel invincible, you have the makings of a market top.

In addition, the New-Highs New-Lows are reflecting weak market breadth along with the NYSE Tick. When you put it all together, you see a market going higher on fumes. Yes, the market could go even higher, especially if central banks around the world keep announcing programs to lower interest rates or increase QE. We are really in uncharted territory here, so no one can predict how this will end. My opinion: It will not end well, but the timing is impossible to predict.

One day we might look back and say it was so obvious that the market was topping out. After all, China is slowing down, Japan is in a deflationary nightmare, and Europe is teetering into a recession. The U.S. is hanging in there although it’s unknown how long it can last when the rest of the world is struggling. We’ll know more as Christmas approaches. Judging by the sentiment surveys, most investors believe there will be a massive rally at the end of the year.

If you are long this market and have profits, this is the time to take something off the table. If you agree this market is in the stratosphere, it is very tempting to go short. My advice: In my most recent MarketWatch column coming out this week, I recommend being patient.

If you are shaking your head in disbelief how fast and furious this market zoomed, sit back and watch what happens. It could be this week or next, or perhaps early next year, but parabolic markets get exhausted and reverse. Ever since the “Bullard Bounce,” the market went straight up without stopping. That cannot last.

If you are one of the few bears still standing and you’re wondering what has happened to the market, this is how I felt in 1999 and in 2007. For now, I am waiting for the “shot across the bow,” or a 50 to 75-point drop in the S&P 500. That would be a significant clue the rally is in trouble.

Finally, this is a holiday week so volume should be light. It’s possible that nothing significant will occur this week, but watch closely. Have a great Thanksgiving and I’ll be back next week.

Each weekend, I study market behavior using sentiment and technical indicators. The goal is to use clues, observation, and indicators to determine if we are in a bullish, bearish, or sideways market environment.

RELEASED: Understanding Options (McGraw-Hill, 2E), Understanding Stocks (McGraw-Hill, 2E), Start Day Trading Now (Adams Media), and Predict the Next Bull or Bear Market and Win (Adams Media): http://bit.ly/1bl0ZNk

AAII survey (11/12/2014)

57.9% Bullish. 19.3% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

Investors Intelligence (11/11/2014)

55.5% Bullish. 14.8% Bearish

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

VIX: 13.31 (on 11/14/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

Moving Averages (daily): The S&P is above its 50-day, 100-day, and 200-day moving averages and pointing up. 

Bearish (Short-term Downtrend): Index crosses below 50-, 100-, or 200-day MA.

Bullish (Short-term Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

MACD (S&P 500): MACD is above its zero line, and above its red 9-day signal line and pointing up. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

Bearish: MACD line crosses below 9-day (red or gray) signal line. MACD line (black line) crosses below zero line.

Bullish: MACD line crosses above 9-day signal line. MACD line crosses above zero line.

RSI (S&P 500): RSI is at 68.26 (on 11/14/2014)

Overbought (i.e. Bearish): When RSI rises to 70 or above.

Oversold (i.e. Bullish): When RSI falls to 30 or below.

Note: RSI can remain overbought or oversold for extended time periods.

Bonds: U.S. 10-year yield is at 2.32% (on 11/14/2014)

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

Analysis: Once again, there is a major divergence between the sentiment and technical indicators. The sentiment indicators are showing an extremely overbought market. The number of bulls who believe we’ll rally into the new year has increased, and many retail and professionals believe the market is unstoppable. If you are new to this blog, that is a very bearish signal. On the other hand, the trend is still up although last week the market went nowhere. Bullish investors believe the market is consolidating before making another bull run. Bearish investors believe the market is weakening and is about to top out. The market, as always, has the final word.

Opinion: Because the sentiment and technical indicators are giving mixed signals, it’s impossible to predict which way this market is headed. If this was a strong bull market, other indicators such as New Highs-New Lows would reflect more strength. As it turns out, the number of stocks making new highs is decreasing. In addition, volume has decreased on all the indexes, which reflects a very narrow rally.

Because of this evidence, one could conclude that although the market is going higher, the market internals are weakening. This divergence is one of the reasons I am not long. Although the market could continue to climb higher, any catalyst could cause another pullback or correction. There is no reason to be afraid, but as I wrote last week, this market is going higher on fumes. It will not end well. No one can predict when it will end, however.

As a trader, I am looking for volatility. As I write this, the futures are down overnight, but that could change by the morning. Keep in mind that almost everyone is expecting a strong year-end rally. Because I know the market fools the most people most of the time, it will be interesting to see if John Q. Investor gets what he wants. I do know this: If the market does have a correction anytime soon, the Fed will say something (anything) to stop a freefall. (More stimulus, anyone?)

Bottom line: Until there is evidence another pullback or correction is coming our way, keep your powder dry. Although investors hate volatility, traders will thrive in that environment.

Note to traders: If you decide to short this week, watch out for those “V” shaped rallies. Take profits quickly.

Each weekend, I study market behavior using sentiment and technical indicators. The goal is to use clues, observation, and indicators to determine if we are in a bullish, bearish, or sideways market environment.

RELEASED: Understanding Options (McGraw-Hill, 2E), Understanding Stocks (McGraw-Hill, 2E), Start Day Trading Now (Adams Media), and Predict the Next Bull or Bear Market and Win (Adams Media): http://bit.ly/1bl0ZNk

AAII survey (11/5/2014)

52.7% Bullish. 15.1% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

Investors Intelligence (11/4/2014)

54.6% Bullish. 15.1% Bearish

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

VIX: 13.12 (on 11/7/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

Moving Averages (daily): The S&P is above its 50-day, 100-day, and 200-day moving averages and pointing up. 

Bearish (Short-term Downtrend): Index crosses below 50-, 100-, or 200-day MA.

Bullish (Short-term Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

MACD (S&P 500): MACD is above its zero line, and above its red 9-day signal line and pointing up. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

Bearish: MACD line crosses below 9-day (red or gray) signal line. MACD line (black line) crosses below zero line.

Bullish: MACD line crosses above 9-day signal line. MACD line crosses above zero line.

RSI (S&P 500): RSI is at 67.04 (on 11/7/2014)

Overbought (i.e. Bearish): When RSI rises to 70 or above.

Oversold (i.e. Bullish): When RSI falls to 30 or below.

Note: RSI can remain overbought or oversold for extended time periods.

Bonds: U.S. 10-year yield is at 2.65% (on 11/7/2014)

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

Analysis: The indicators and clues are pointing in two directions. The indexes have firmly surpassed their moving averages. In addition, MACD is in an uptrend. If you are looking at the technicals, you can’t help but be bullish. The sentiment indicators, on the other hand, are flashing warning signs. While the market climbs higher, retail investors are feeling overly exuberant along with money managers and financial writers. The AAII sentiment survey is showing the lowest number of bears in many years. In addition, the VIX is back to its lows and the RSI is showing overbought conditions. What does it mean? It means we could still go higher but caution is strongly advised.

Opinion: Who are you going to believe: the technical indicators or sentiment indicators? As you see above, there is a major divergence. If you follow the trend, which is usually a prudent idea, you are long. Typically, the trend is your friend and when the market is above its moving averages (among other things), the odds are good that you will be on the right side of the market.

On the other hand, the market rebounded so fast and so quickly that the trend could be going parabolic, which is a red flag. It is not surprising that the majority of investors and money managers are wildly bullish right now. Everything seems to be going their way.

In my opinion, the market is going higher, but on fumes. It won’t take much to send this market lower. Once the crowd starts to feel nervous and fearful, they’ll sell in a heartbeat. Unfortunately, no one can predict when that will happen. Note that I said, “Will.” Yes, the markets will reverse direction one day, and there will be a major correction. It’s taken a long time, and you may have to wait longer.

Here’s what I’m doing: As a long-term, patient trader, I make the most money when the market is volatile. We had a volatile market a few weeks ago, but that temporarily ended. Now we’re back to the daily “V” shaped buy-on-the-dip rally. Very little volume and volatility, just the way long-term investors like it. If this keeps up, we’ll be at 18,000 by January.

If you are looking to make (or possibly, lose) big money, when the market gets volatile again, you can take action. There are several ways to do this: ETFs and options are my preferred methods, but skilled traders might trade individual stocks as well.

When the market gets volatile again, remember this rule: Take profits quickly! I still believe this uptrend is on its last legs, but knowing when it will roll over is difficult to predict. I take it one day at a time. Nevertheless, when this current rally falters again, be ready to take action (if you dare).

Bottom line: Because of the divergence of technical and sentiment indicators, it’s impossible to predict where the market will go this week. If possible, be on the sidelines in cash and get ready to plunge when the market reveals its hand. Be patient, as always, and be prepared for volatility. That’s when traders will shine and many investors will run for cover.

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.

Each weekend, I study market behavior using sentiment and technical indicators. The goal is to use clues, observation, and indicators to determine if we are in a bullish, bearish, or sideways market environment.

RELEASED: Understanding Options (McGraw-Hill, 2E), Understanding Stocks (McGraw-Hill, 2E), Start Day Trading Now (Adams Media), and Predict the Next Bull or Bear Market and Win (Adams Media): http://bit.ly/1bl0ZNk

AAII survey (10/29/2014)

49.4% Bullish. 21.1% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

Investors Intelligence (10/29/2014)

47.0% Bullish. 16.3% Bearish

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

VIX: 14.03 (on 10/31/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

Moving Averages (daily): The S&P is above its 50-day, 100-day, and 200-day moving averages and pointing up. 

Bearish (Short-term Downtrend): Index crosses below 50-, 100-, or 200-day MA.

Bullish (Short-term Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

MACD (S&P 500): MACD is even with its zero line, but above its red 9-day signal line and pointing up. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

Bearish: MACD line crosses below 9-day (red or gray) signal line. MACD line (black line) crosses below zero line.

Bullish: MACD line crosses above 9-day signal line. MACD line crosses above zero line.

RSI (S&P 500): RSI is at 42.47 (on 10/31/2014)

Overbought (i.e. Bearish): When RSI rises to 70 or above.

Oversold (i.e. Bullish): When RSI falls to 30 or below.

Note: RSI can remain overbought or oversold for extended time periods.

Bonds: U.S. 10-year yield is at 2.34% (on 10/31/2014)

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

Analysis: Sentiment has increased along with the indexes. Although not completely in the danger zone, sentiment is getting frothy again. The VIX reflects complacency (again). The uptrend seems intact as the indexes rose back above their moving averages. This is an important week: If the indexes remain above their moving averages, the market is going higher. If not, it will be a rough ride. Note: Long term, I am looking at 1959 on the S&P 500 as the line in the sand. If it drops below that, look out below.

Opinion: As I mentioned last week, Dow 17,000 was a real possibility, and it happened, thanks to a big boost from the Bank of Japan. As a result, the market rallied on Friday (as well as on Thursday).

As I wrote in my latest column for MarketWatch (coming out this week), Friday’s rally was a head fake. It appeared strong but in fact there was little institutional support, breadth, or volume. Although amateurs might think it was a good day, in fact this market could run out of steam quickly.

As I’ve repeatedly said in the past, I believe this market is still too dangerous to enter.

Note: If you feel you must be long this market and can’t bear to miss out on any short-term rallies, consider buying call options (this is only for knowledgeable traders or those who read my book, Understanding Options 2E). Buying call options is speculation, and most speculators lose. Nevertheless, call options can be profitable if you are right about the timing and direction of the market or individual stocks.

Bottom line: It should be a volatile week because of the election, and second thoughts about the surprise BOJ announcement.

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.