I want to start this posting with a quick review of the monthly chart in order to help clarify my thinking. After completing a TD Combo sell countdown to bar #13 in February we have yet to have a price flip for a sell signal. Such a flip would occur in June if we were to close the month below 1327.22. At the end of May we made a TD sell setup bar #9. This puts added emphasis on the possibility of an important top being made.
The weekly chart made a TD Sequential (sell) #13 bar on February 18, 2011 (completing in conjunction with the monthly TD Combo). On this time frame we did have a price flip - on March 11. For this sell signal, the calculated risk (stop loss) level was 1363.53. We closed above this level on April 29 which led me to expect still higher highs. Since then the question is whether or not that break of the risk level disqualified the sell signal or if it were only a false breakout. It all depends on how you define a qualified break. My working hypothesis has been that it was a qualified break and so we will see new highs without breaking below the 1294.7 level (the April 18 low). If the 1294.7 level is broken I will have to re-look my working definition of what constitutes a qualified break (realizing that no methodology will ever be perfect).
We closed below the short (red) moving average this week and now have to see whether that break is confirmed or not. Last week I gave a few reasons on why any break of this average would not be confirmed. Let's review them. (1) A primary reason for my belief is that the monthly chart is still positive. But again, perhaps my definition is wrong. Maybe the monthly shows both a completed TD Combo and a completed TD Sell Setup with neither one negated. Even if one "trades" with a price flip, perhaps the chart should be defined as bearish on signal completion - not trade entry. (2) I have been viewing the RSI (top pane) in a positive rather than negative fashion. Instead of relying on the displayed bearish divergence, I had been focusing on the possible positive reversal (shown by the two arrows on the RSI which match the November 26, 2010 and March 18, 2011 price closes). This reversal calculated to a 1432.81 price target. However, as can be seen from the chart, this positive reversal has been negated; leaving the bearish divergence!
All of the above point to the fact that the monthly and weekly charts are quite weak right now; if not outright bearish. Also of note is the fact that the break (two weeks ago) of the TD Demand Line (upsloping green line) in a qualified manner gives a calculated objective of 1282.73 to the downside. Note that the medium (blue) moving average will be near this level this upcoming week. It looks like this objective will be met if we confirm the break of the short moving average.
Bottom Line: Assuming the Sequential risk level of 1363.53 was confirmed broken, the weekly chart is in a bullish position and so my allocation mix meter is at +100%. Although currently still expecting new highs there are warning signs that all is not well with the equity markets. Any violation of the 1294.7 level this week will immediately make me take half my position off the table (allocation meter falls to +50%).
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