Using trend-following technical analysis techniques, one would continue to desire to follow the trend, trade "what you see" as opposed to trade "what you believe."  However, the "believe" is the challenging word, as we are inclined to believe that the age of this rally in equities is in its final days.

There are more signs of tiredness in this uptrend. We watch the percentage of stocks trading above their 50-day moving averages; both of these indicators for the S&P500 and the Nasdaq have been in the 85-95 range since early October, a range that in the past has preceeded market declines. See the Nasdaq Bullish Percentage chart below. Note that whenever the red Bullish Percentage line is in the 85-90 area, the green equity index line ultimately turns down.

In previous blogs we have noted that VIX has fallen to levels that are risky for equity longs. Once again, VIX has gapped well-below its 50-day moving average, a sign of caution for bulls.  See the blue rectangle in the lower right portion of the chart below:

The Put/Call ratio has also closed at a relatively low .71 (a contrary bearish sign), and Advance/Decline stats have started to weaken (the Nasdaq A/D fell while prices rose on Friday, a negative divergence).

A negative cross of the NYSE McClellan Oscillator, below its 20-day exponential moving average, is further cause for concern. To rub more salt in the wound, Financials took a significant hit versus the S&P500 over the last two trading days. Although we have seen a solid uplift with technology stock outperformance (thanks mostly to Google), we would prefer to see relative strength in Financials also (we had seen a few such signs during the previous week).

So, what we "see" in the markets is a potential trend-change, which may simply be a correction or even a consolidation of recent gains. We plan to tighten stops, take select profits, and hedge with partial short positions just in case the trend change signals prove true.

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