Don't Trust the New Rally Until You See This Signal

By Tom Dyson

The bull market is back on... almost.

The S&P 500, the most important stock index in the world, is racing to new highs. Two weeks ago, I was ready to proclaim the bear market rally "dead." Then the market whipsawed. It broke to new nine-month highs last week and is now closing in on the 1,000 milestone...



But wait... what about Russia?

To help me keep track of the major trends in the market, I maintain a list of 87 exchange-traded funds (ETFs). These ETFs represent every major stock sector, currency, commodity, and country index. I calculate the three-month performance of each ETF and then order them first to last. By analyzing this list, I can immediately tell which sectors the money's flowing into and which sectors it's leaving.

Russia represents everything stock-market bulls are in love with: Growth in third-world consumption, scarce commodities, global trade, and cheap labor.

Russia topped my ETF performance list from the moment the stock market started rallying in March... until it topped out in June. If Russian stocks aren't soaring, there's a problem.

Below is a chart of Russian stocks, as measured by the Market Vectors Russia ETF (RSX). They made new bull market highs in May, pulled back during June, and started rising again in July. Unlike the S&P 500, Russia has not made new highs.



As Jesse Livermore, the original and most famous trend trader used to say, "As the leaders go, so goes the entire market."

Besides Russia, financials, homebuilding, and Indian stocks led the recent market rally. All those charts look a lot like the one above.

Until you see these sectors make new highs, you should remain skeptical of the current rally in the S&P… even though it's enticing.

When I see these sectors make new highs, I'll be ready to issue the "all clear." Until then, I recommend you keep your powder dry...

Good investing,

Tom.

Classic Chart Pattern Predicts Bad News Followed By Good News

By Rick Pendergraft

In last week’s article, I pointed out three levels of resistance that I thought would keep the S&P in check over the next few months. I have to admit that so far, that prediction is looking good, but one week does not make a trend.

In an interview on Fox Business News last Monday, I pointed out the same three levels of resistance to Fox viewers that I pointed out to IDE readers earlier that morning (it pays to subscribe). One thing I did on Fox that I didn’t do in IDE was make a recommendation, so I feel like I owe readers something. My recommendation on Fox was to buy the ProShares UltraShort S&P 500 ETF (SDS). I still think this is a good pick and I think it could jump 30-40% over the coming weeks. As a bonus pick, I think you can make every bit as much with the QID, which is the ProShares UltraShort QQQ ETF.




After looking even closer at the charts, I noticed what appears to be a very well defined inverse head and shoulders pattern. Look at the weekly chart below to see the different parts of the formation.

One thing that strikes me about this chart so far is the symmetry of the move from the neckline to the head and from the head back to the neckline. Each of these moves lasted nine weeks. It doesn’t have to be that well defined to fit as an inverse head and shoulders pattern, but it struck me as interesting.

So where does this leave us? It looks to me like the S&P will decline over the next 7-8 weeks and then should start to find support near the 750 level. If the 750 level holds as support and we start heading higher again, you could play the up move for about six weeks or so and then see what happens after it reaches the 950 level again.

If all of this pans out the way I think it will, the end of this year could see an explosive move to the upside as it breaks above the neckline.

The thing about head and shoulders patterns is that you typically want to wait and play the break above (on an inverse) or below (on a regular H&S). The big move comes after the pattern is complete.

In the interim, you can play the short side as I think the three resistance levels I talked about last week will be too much to overcome when the S&P is as overbought as it is on the daily and weekly charts. We move down again, the moving averages have time to catch up, and we won’t be as far below the 52-week (360-day) moving average as we are now.

We saw a similar pattern develop in the 2000-2002 bear market. It wasn’t as clearly defined as the one we are seeing develop now, but it was there never the less.

Be patient, the biggest gains are yet to come. The rally from the March low was very enticing, but there is even more money to be made if this plays out as I think it will.

Good luck and good trading,
Rick