On CNBC Thursday, Carter Worth rescinded has breakout call that he made on Tuesday. He said that he expects the market to “rest”. Now, if you are a bear, this might make you uncomfortable because your position just got a little bit more crowded. However, at the end of a long move, you often see a shift in sentiment like this just before the market changes direction. This rally can’t correct until the bulls start pulling their bids and defect to the bear army, right? So, we may just be seeing the very beginning of a shift in sentiment from bullish to bearish.

Thursday was obviously a clear win for the bears. The bulls got a lot of good news in the morning, but the market sold-off on strong volume anyway. Things have gotten a bit chaotic and the bulls need to send in the troops to restore order before the hunters become the hunted. As I write, the futures have rallied a few points on another beat from yet another China PMI report, and we have a bunch more economic reports this morning. So, if the reports continue to come in strong, will the bulls be able to get the ball rolling again? Or will they turn lemonade back into lemons like they did Thursday morning?

Laggards Join the Rally
Carter Worth’s prediction that small-caps and transports would break out came true on Wednesday. However, it wasn’t a decisive victory. The IWM made a new closing high for the rally, but it came up short of taking out the intra-day high of 68.00 from June 21st. It missed by a nickel. The IYT did the same thing: it made a new closing high, but came up a penny short of the intra-day high of 82.26 set on September 21st.

Note to bulls: nice try.

Also, it seemed like money was rotating out of large caps and tech, and into small caps, transports, and energies. The SPX, NDX, and Dow were all down a bit on the day. Of course, this rotation makes sense since there is no new money coming into the market. Retail investors pulled out another $2.5 billion last week.

Laggard XLF dropped on the day, so there was no rotation into the hapless financials, and XLF is nowhere near breaking out of its five-month long trading range. But since the market demonstrated an appetite to rotate into the laggards, if we get another rotation day, the XLF might play “catch up” with a monster move. So, you might want to keep it on your screen, along with UYG and FAS if you are the gambling sort.

Weak Selling Volume Again
After the market dropped on Monday, I said: “Volume on Monday was light, so the selling was not serious.” And the market did indeed rally back a bit on Tuesday. And while SPY dropped 20¢ on Wednesday, it’s volume declined from Tuesday. So: bears beware.

Floppy Futes
Overnight, the SPX futures often like to test the previous day’s highs and lows. Tonight, they have chosen to test Wednesday’s lows. That might not be terribly bearish, but you can’t call it bullish either. (As of this writing, Wednesday’s low has held.)

Swim or Die

The bulls have been rather lazy this week with the SPX suffering a four-point loss so far, and it just might be swim-or-die time. On the chart below is the 60-minute SPX with the 20-period moving average in red, and the 50-period in blue. Notice how they are within striking distance of a cross-down (click chart to enlarge):

Now look at August 10th. That cross-down lead to a good deal of unpleasantness. And if you are a day-trader, you want to be aware that the cross occurred in the middle of the day, but the market then rallied smartly into the close. Then it gapped down the next morning. So, just because you spot a critical cross-down, it doesn’t mean that the market won’t fake you out, and even leave you leaning the wrong way before the big move. The market is very sinister that way, and will, in fact, fake you out 99% of the time – even when you are hunting the move and have the right idea.

Notice also that we almost had a cross-down on September 23rd, but the market then blasted higher. The moral of the story is that such cross-downs are often momentous, but tricky to play.

No Quick Way Down?
In this amazing video, the commentator says that when climbing one of these gigantic radio towers, you need to make sure to bring everything you need because there is no quick way down. Of course, there is a quick way down, but it ends with a nasty splat.

So, you bulls have climbed to the top of a very high tower. If you haven’t packed any put-options, you might want to consider using your broker’s iPhone app to buy a few for splat-insurance. (Hat tip to my colleague, Larry, who sent me the video link.)

Update
After being in the red all night, futures blasted into the green after both GDP and Unemployment Claims came in better than expected at 8:30am Thursday morning.

The market closed on Tuesday afternoon with my cloud indicator showing a bearish red cloud. The one-minute chart below shows an octo-cloud with SPY, and two white arrows. Those arrows point to the bars where the top two cloud indicators (the most important) both turned red. SPY flopped over immediately both times (click chart to enlarge):

Since this is a very short-term indicator, it is possible that the market won’t drop any more than it did in the last five minutes of trading. The storm could be over already. However, when the market is very strong, it will stubbornly go sideways after a red cloud, and then go higher as soon as the cloud dissipates. But on Tuesday, it flopped over very quickly both times. If the news-flow is neutral-to-negative in the morning, then the market is vulnerable. If the market gaps-up, buying into it will likely result in unpleasantness.

When China’s PMI beat expectations at 10:30pm EST Tuesday night, the SPX futures rallied exactly 0.50 points. So, that’s a potential indication of buyer’s fatigue.

Apple dropped 1.33% on Tuesday. But even if it was only a “misunderstanding” due to a rumor, you can’t ignore the facts that AAPL did not fully recover after the rumor was dispelled on CNBC, and that the stock fell on the heaviest volume in over two months.

The IWM made a new closing high, but after the bell it fell back below the previous high of 67.43 from September 21st. The IYT did sort of the same thing: it made a new closing high, but couldn’t close above the intra-day highs of the 21st. They couldn’t fight through my red cloud, but Carter Worth thinks they will break out. Maybe he will be right, but with the way AAPL is acting, I would be nervous about making bullish calls here.

My other two laggards, the XLE and XLF didn’t even come close to breaking out. XLE had a decent day, but XLF still looks pretty forlorn. However, I will say that the XLF held up very well when Maria Bartiromo tried to crash the banks when she was interviewing Meredith Whitney during the last hour of trading on Tuesday. Bartiromo was trying to create some drama, but the XLF shook it off. Maybe it was only because the shorts were being squeezed into the close, but it was indeed bullish behavior, and I hereby authorize the XLF to go about with a feather in its cap today.

Note: Red sky at night, sailor’s delight is a weather expression.

On Monday, September 20th, I pointed out that the XLF, IWM, and IYT were not validating the SPX’s breakout above 1130. Last night, I brought up the subject again. And today, Carter Worth, chief market technician of Oppenheimer Asset Management presented my observation on CNBC.

Here’s one of my quotes:

“A week ago, I pointed out that the XLF, IWM, and IYT were not validating the SPX’s breakout above 1130, and they still aren’t. “

Here’s what Carter Worth said in the video below:

“To figure out whether the market, as measured by the S&P is going to go higher, it’s good to look at some other indices and see where they are in relation to the June and August tops. Let’s look at the Russel and the Dow Jones Transportation Average.”

Note: As I’m sure you know, the IWM is the ETF that tracks the Russell 2000 index, and the IYT tracks the Dow Jones Transportation Average. So, Carter Worth and I were talking about the same thing.

Note to CNBC: That will be $100. Since I am obviously writing content for your station, it is against the law for you to not pay me. You can PayPal the cash to the address on my About page.

Note to Oppenheimer: That will be $1000. You got a lot of free publicity from CNBC after all.

A week ago, I pointed out that the XLF, IWM, and IYT were not validating the SPX’s breakout above 1130, and they still aren’t. In addition to those three laggards is the XLE. If the global economy were on fire, surely the energy stocks would be breaking out, right?

Nevertheless, IWM, IYT, and XLE are all within one day’s march of victory. So, bears should bear (ha, ha) that in mind. Volume on Monday was light, so the selling was not serious.

Both the IWM and IYT are “crawling along” their resistance levels, and that is usually a bullish indication because it shows a relentless eroding of the barrier. The IWM also did not make a lower intra-day low in Monday’s whoosh down into the bell.

The XLE doesn’t look terribly perky, but it did rally on strong volume Friday, and consolidated on light volume Monday, so that’s a bullish posture.

The XLF is the train-wreck of the group. Its rally volume on Friday was ho-hum, and it would probably need two strong days to take out $15.09. Morgan Stanly’s hiring freeze isn’t helping matters.