On December 16th, 2008 I issued a TRIN Alert when the SPX was at 913. After four days of plunging, it bottomed out at 857.

On February 5th, 2009 I issued a TRIN Alert when the SPX was at 846. It continued to rally up to 876 over the next two days, but then rolled over and began the historic plunge to 666.

And now, drum roll please….

The three-day moving average of the TRIN that I use is more overbought than it was in the previous TRIN Alerts. In fact, this is the most overbought reading in 7.5 years.

In the upper panel of the chart below is the three-day moving average of the TRIN. The lower the number the more overbought the market it is, and vice versa. In the lower panel is the SPX. The purple arrow points to Thursday’s reading of 0.51. If you follow the blue horizontal line to the left, you will see that it is the lowest reading on the chart. (Click chart to enlarge):

The TRIN is a pretty good overbought/oversold indicator. However, “too much buying” isn’t always bearish. If you look at the red arrow, you will see that the second lowest reading on the chart came on March 10, 2009 at the beginning of the historic rally. Everybody was short at that time, and then FASB waved its magic wand to make all the banks solvent again by revoking the market-to-market accounting rule, and everybody had to cover-up. But the next day, the SPX opened at 721, and then closed at 721. Even then, the overbought TRIN held the market back, if only for one day.

So, the odds definitely favor the bears at this juncture.

Of course, there is no sure thing in the stock market. And here are three possibilites that could power the market throught this TRIN reading:

1) We are coming out of a period of very negitive sentiment, which means that there might be a lot more short-squeeze fuel for the market.
2) It is possible that the big dogs have decided to rotate out of bonds and into stocks.
3) Joe Sixpack has contracted stock-fever again and is piling in 1990s style. (Not very likely.)

So which is it? Has the market just completed a short squeeze and is now ready to roll over? Or have we just seen the opening salvo of a massive buying spree?

Photo Finish
Going into the bell on Wednesday, the SPX was striving to take out its August 23rd peak up at 1081.58. It was a photo-finish, but the market came up short topping out at 1081.30. So, that might be a bearish indication for Thursday morning. However, the SPX futures did exceed their equivalent peak at 1080.25, but they have dropped back below as I write. So, that’s the level to watch in the overnight futures: 1080.25.

The R2K is above its August 23rd peak, and it’s bullish when the small-caps lead. However, the NDX is 22 points below its 8/23 peak, and it’s not bullish when techs are lagging. In summary: tricky.

There are lot of economic reports Thursday morning, and Congressional testimony from Ben Bernanke at 9am. Will the SPX take out, and hold above 1081.58?

China PMI
The SPX futures jumped 5 points when China’s PMI report printed a bit better than expected at 9pm EST on Tuesday night. You can follow China’s economic reports on this site. The country code is CNY.

Note: I may add more notes (ha, ha) to this later.

What’s that you say? You don’t have your automated trading strategies running in the cloud? WTF?

The SPX had its final-hurrah today up at 1060 just as my “cloud computing” indicator went purple (click to enlarge):

White bars indicate a neutral condition; yellow means caution, red means the rally is toast, and purple is a brick wall. If all four bars go red/purple, then the bulls are about to get tossed on the barbie.

The cloud indicator gives mean-reversion signals. So, I only use it during the middle of the trading day. The first and last hours of trading exhibit positive feedback more often than not, so trend-following strategies usually work better than mean-reversion strategies. However, the color of the cloud often gives a clue about the next morning. Here is how the octo-cloud looked at Friday’s close:

The market was poised to roll down from a stretched condition, and it was indeed weak first thing this morning.

Here it is at today’s close:

Light blue is a bullish signal; green is a buy signal, and navy blue means the market can’t really drop any more without some consolidation first. Even though the market was in a positive-feedback plunge into the close, notice that it flattened out after the cluster of navy blue bars at 15:20pm. It spent 25 minutes consolidating before beginning the next leg down.

If you went short at the close, chances are good that you are in for a bit of squeezing tomorrow morning. But this is a very short-term scalping indicator, and it only predicts the very near future.

I could tell you how this works, but then I’d have to kill you.

On Friday, Ben Bernanke proclaimed that the Fed will not permit deflation:

“The FOMC will strongly resist deviations from price stability in the downward direction.”

TLT plunged 2.79% on the day (and TBT soared 5.65%). So, did Bernanke kill the bond bubble? Did the tidal wave of money that rotated out of stocks and into bonds reverse course on Friday?