A Cautious Rally

The bounce since early July has been on weak volume (in part seasonal), as the trend remains down from the April 26th highs. RSI and the Bullish Percentage indicators are pushing up to their bear market extremes (i.e. we have not seen a 95% bullish percent reading since the solid uptrend that ended in late April, and we are nearing a bearish bullish percentage extreme near 45, with the current SPXBP reading at 34. Treasuries remain strong and have consolidated a bit from their highs, inviting a possible entry point for longs).

We also have Dow Theory confirmation of a downtrend as both the Dow Jones Industrials and the Dow Transportation Index print lower lows and lower highs. Advance/Decline ratios (NYA and the Nasdaq) are approaching highs similar to those at peaks during the March 09 - April 10 uptrend, indicating internal weakness as the indices themselves are at lower highs.  And our favorite NYSE McClellan Oscilator seems to have neared a peak similar to those experienced at index peaks during the same March 09 - April 10 time frame. When internal market strength pushes to previous highs without price similarly reaching previous highs, one must remain skeptical about the current rally.

A positive we have identified is the growing number of ETF's and individual company stocks that are generating buy signals (some on higher volume); when we see a growing trend of such signals, we cannot ignore the possibility that this activity is a precursor to a trend change. 


Our strategy has been to take partial profits on long positions and edge into short positions, as we have shifted our stance from bullish (bounce) to neutral-bearish as the rally unfolds. We are prepared to reverse this strategy should the buy signals continue to accumulate.

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