Great Trades

Not including the February 3 intraday long for 200+ Dow points, and not including the short gold hedge from the exact peak day, our trading model's performance based on a hypothetical $10,000 account and our blog posts, updated from the February performance post, shows growth to $14,230, or 42.3%, vs. the S&P 500's -11.7% return on the year so far. Here are the March trades:

Speculative traders, using a separate hypothetical $10,000 account for calculation, would have made an additional 39.1%, including 16.4% through February:




Commissions are not included in the above calculations, nor is interest credited for cash or interest charged on any margin. Closing prices were used for end of day trades, and approximate intraday prices for intraday posts.

While definitely not a perfect month, we were able to cover our heavily leveraged shorts and get heavily leveraged long right near the early March low. Unfortunately, we sold out of our longs and got short too soon during the rally, leaving a lot of gains on the table on very well-selected longs that moved up significantly more later in the month (e.g., HIG, BAC, PTV, financials). For any future bear market rallies off an extremely oversold level, we'll try to be more patient with longs, perhaps holding on to such individual stocks and hedging with index shorts at overbought levels.

Open Positions: Short 20% S&P 500, short 30% financials, speculative traders short another 20% S&P 500, short another 40% financials.

On the market's pop over 800 SPX, testing 803-805 resistance, our trading model added 10% more financials short, 20% more for speculative traders.

Open Positions: Short 20% S&P 500, short 30% financials, speculative traders short another 20% S&P 500, short another 40% financials.

With the S&P 500 testing 800 (SPY 80), our trading model is restarting a short on the S&P 500.

Open Positions: Short 20% S&P 500, short 20% financials, speculative traders short another 20% S&P 500, short another 20% financials.

On the gap open, our trading model sold the financials long to take a nice overnight profit and started a short position in financials.

Open Positions: Short 20% financials, speculative traders short another 20% financials.

We said on Friday, "We'll show this weekend why we expect a more significant pullback soon." The weekend was hectic, so here are the updated indicators, with today's action included:

This daily SPX chart shows that today was the first 9-to-1 volume down day since the rally started, following several 9-to-1 volume up days:

Here's the weekly SPX chart, showing a bullish divergence with PPO, which last week had a bullish cross buy signal:


The SPX has broken out from its weekly downtrend, and is now backtesting that trend line.


On the hourly chart, the SPX broke down from its channel today after several bearish divergences during the rally:

This chart of the Tick 10-day EMA readings shows that this selloff has already relieved the overextended condition of this indicator, though it can go much lower:



The updated $CPC Put/Call ratio (10-day EMA) chart shows this EMA has come well off its lows, but is still relatively low:



The updated NYMO chart shows that the overextended condition of this indicator has also been relieved, but it can go much lower:



The Nasdaq/SPX ratio remains at a new high level, whereas its been at a low at previous market lows, but that divergence probably has more to do with the fact that bank stocks have been clobbered (and replaced Nasdaq stocks as the speculative trading stocks of choice), and there are far more bank stocks in the SPX than Nasdaq:



Finally, here's the updated NYSE Summation Index (cumulative NYMO) chart:


NYSI has reached the level of last summer, but still is well below the level reached at the beginning of January.


Overall, the market is likely to pull back/consolidate some more before resuming the rally. We'll watch the nature of this pullback/consolidation to determine when/how much to increase long exposure, or whether to reshort first.

There have been some wild intraday swings recently, sometimes several percentage points in both directions multiple times. These conditions have made it very difficult to trade without closing out and opening positions intraday. We were hoping to only do posts after the close, but as conditions warrant, we'll continue to post intraday updates as well.

After a steep late drop in the financials, our trading model has restarted a long in financials for a rebound. With end of month and mark-to-market news coming out soon, there's a good chance for a good bounceback coming.

Open Positions: Long 20% financials, speculative traders long another 20% financials.

With the market's rather tepid rally off the lows, our trading model has moved back to cash.

Open Positions: None.

With GE back below 10, our trading model has rebought some long GE.

Open Positions: Long 20% financials, long 20% S&P 500, long 5% GE, speculative traders long another 20% financials, long another 20% S&P 500, long another 5% GE.

With some positive divergences showing up on our intraday indicators, our trading model has added a partial S&P 500 long position for a potential bounce into month end.

Open Positions: Long 20% financials, long 20% S&P 500, speculative traders long another 20% financials, long another 20% S&P 500.

With financials' relative strength since the open, our trading model has started a partial long position in financials for a bounce into month end.

Open Positions: Long 20% financials, speculative traders long another 20% financials.

With the retest of the day's low after a big gap down, ahead of quarter end tomorrow, our trading model has taken profits on the SPY puts, moving to cash for now.

Open Positions: None

On the huge gap down, our trading model has covered the MET short in the lower 22's for a quick 10%+ gain.

Open Positions: 1% long SPY April 77 puts, speculative traders long an additional 1% SPY April 77 puts.

On the very quick 3.5%+ drop in financials, our trading model covered the short financials position to lock in a quick profit and make room to reshort on a bounce.

Open Positions: 5% short MET, 1% long SPY April 77 puts, speculative traders short an additional 5% MET, long an additional 1% SPY April 77 puts.

Last week, our trading model shorted MET in the 25's and covered in the 20's. MET again is at 25, so our trading model is shorting MET again.

Open Positions: 5% short MET, 20% short financials, 1% long SPY April 77 puts, speculative traders short an additional 5% MET, short an additional 20% financials, long an additional 1% SPY April 77 puts.

With financials turning positive on the day, near yesterday's highs, and not far from their rally highs, our trading model has started a short on financials.

Open Positions: 20% short financials, 1% long SPY April 77 puts, speculative traders short an additional 20% financials, long an additional 1% SPY April 77 puts.

With the S&P 500 bouncing back over 1% from this morning's low, and well above our long entry yesterday, our trading model is taking profits on the remaining S&P 500 long.

Open Positions: 1% long SPY April 77 puts, speculative traders long an additional 1% SPY April 77 puts.

With financials bouncing over 3% from this morning's low, our trading model has taken profits on the financials positions for a nice, quick gain. We're reducing long exposure on the bounce and plan to reverse to short soon.

Open Positions: 40% long S&P 500, 1% long SPY April 77 puts, speculative traders long an additional 40% long S&P 500, and an additional 1% SPY April 77 puts.

On the market's early weakness today, our trading model added to longs for a short-term bounce near yesterday's lows on the S&P 500. However, we don't intend to hold this trade for long, as the market is very extended and we plan to reverse to short soon.

We'll show this weekend why we expect a more significant pullback soon, but we're buyers of this dip, at least for a day trade. As we mentioned yesterday, "All dips are getting bought up quickly, and month end is coming up," so we expect a bounce from this early weakness, and possibly one more new high.

Open Positions: 40% long S&P 500, long 40% financials1% long SPY April 77 puts, speculative traders long an additional 40% long S&P 500 and 50% financials, and an additional 1% SPY April 77 puts.

With the market holding on to yesterday's late gains as well as additional gains today, our trading model has bought long S&P 500 and financials for a likely breakout, with the SPY puts held as a hedge. Also, covered MET flat in case of breakout.

All dips are getting bought up quickly, and month end is coming up, so we're buying this dip for a likely breakout to a new high, though it may be fairly short-lived. The action late yesterday and this morning indicates there are many traders caught short this market.

Open Positions: 30% long S&P 500, long 30% financials, 1% long SPY April 77 puts, speculative traders long an additional 30% S&P 500 and 30% financials, and an additional 1% SPY April 77 puts.

Last week, our trading model shorted MET in the 25's and covered in the 20's. MET again is at 25, so our trading model is shorting MET again.

Open Positions: 5% short MET, 1% long SPY April 77 puts, speculative traders short an additional 5% MET, long an additional 1% SPY April 77 puts.

With the Dow selling off over 300 points from the high to the low today, and then bouncing back to close only 113 points off the high, it was a crazy day. Our trading model covered shorts, holding the SPY puts bought earlier today in their place. Even with the market recovery, the puts bought earlier are still up over 17%, and will act as downside protection when we go long, likely on either another pullback or a breakout of today's highs.

Here's a 1-minute chart of today's action, showing why the lower high just after noon was a great short entry and then why the 3:00 panic selling was time to cover shorts:


At the top of the chart in green and red are the up volume vs down volume and down volume vs. up volume graphs. Below that is the TRIN chart, which shows the volume going to advancing issues vs. declining issues. The TRIN moves inversely to the market. Below that is TICK, which shows issues upticking vs. downticking. Finally, below the TICK are charts of the S&P 500 ETF (SPY) and the triple long financials ETF (FAS).

Just after noon, the market retested the day's high but couldn't make a new high. Up volume, shown at the top, had dropped dramatically vs. down volume. TRIN had moved up dramatically from under 0.5 to 2.00, a strong negative divergence. TICK was downtrending despite the rally. Our trading model signaled it was time to add to shorts.

Over the next 3 hours, the market sold off dramatically. Just before 3:00, TICK hit an extreme level of -1450, signaling panic selling. Just after 3:00, TRIN peaked at an extreme level well over 3.0. TICK began to turn positive. The market was clearly turning around again.

The S&P 500 bounced off its 50-day moving average and rebounded to close almost 1% higher after dropping to almost 2% lower. It was an impressive rebound from a sharp pullback.

The strength of the bounce off the lows, particularly in the last few minutes, indicated significant short covering. As we mentioned yesterday, there have been "clear bouts of frenzied short covering after recent pullbacks," and today's late action proved that to be true yet again.

While yesterday's and today's pullbacks have relieved much of the short-term overbought conditions, the market is still likely to have a more significant pullback at some point fairly soon. However, that pullback could come from a significantly higher level now. If it comes immediately, we still have our puts to profit from it.

Given our bullish intermediate-term outlook, month end coming up (where portfolio managers will want to show long exposure during this rally), and the high amount of short buying power in the market, we're more comfortable for now holding our puts and going long with put protection on a pullback or a breakout.

Open Positions: 1% long SPY April 77 puts, speculative traders long an additional 1% SPY April 77 puts.

With the market retesting the day's highs amidst negative divergences and indicators (e.g., higher TRIN, wosening internals), our trading model is reshorting the financials shorts covered yesterday and buying S&P 500 April put options (SPY April 77 puts at around 1.33). Financials did not break yesterday's high, so our stops were not hit.

The SPY puts are meant to be downside protection for when we cover our shorts and go long, as we'll want protection for the downside when we reverse to long. A 1% position in the SPY puts will provide protection for a good percentage long allocation.

Open Positions: 25% short S&P 500, 30% short financials, 1% long SPY April 77 puts, speculative traders short an additional 15% S&P 500, short financials an additional 40%, long an additional 1% SPY April 77 puts.

With the S&P 500 down over 2% to near 805 support and financials down about 5.5% at today's close, our trading model is taking profits on the shorts added at yesterday's close. After yesterday's huge rally and today's pullback, the S&P 500 is only 3 points (less than .5%) above Thursday's high, and financials are over 7.5% lower than Thursday's high.

Despite overbought short-term conditions, this market has powered higher from every pullback in this rally so far. Given our positive intermediate view of the market, along with clear bouts of frenzied short covering after recent pullbacks, we're being conservative on our shorts, with a stop at today's high for remaining shorts. With a large number of shorts looking to cover, and 800-805 previous resistance now providing support, we could see another surge higher even with short-term technicals extended.

Looking back over the last couple of weeks, our trading model got heavily long right at/near the bottom for this rally in the upper 600's on the S&P 500 (after being heavily short from the 780 area, and the upper 800's before that). However, it reversed to short based on short-term overbought conditions too soon, as this rally has been much more powerful than other recent rallies. It also covered on the pullbacks only partially, when in retrospect it should have reversed to long given our positive intermediate-term outlook.

We're fine-tuning our trading model to be much more careful reversing during a trend, and much quicker to close out counter-trend moves going against our outlook. Also, when we see upside coming, such as during yesterday's consolidation just under 800, our model will reverse to long rather than partially close out positions, as it did ahead of the Fed meeting last week.

Here's the updated weekly S&P 500 chart, again showing one reason we have a positive intermediate-term outlook:

After the huge ramp into the close, which looks like a giant short squeeze, our trading model has reshorted the positions covered under 800 S&P 500, at about 25 points higher.

Open Positions: 50% short S&P 500, 30% short financials, speculative traders short an additional 30% S&P 500, short financials an additional 40%.

With the S&P 500 consolidating under the 800 level rather than selling off sharply like the two times it reached this area late last week, our trading model is covering half the remaining shorts to reduce risk.

We did get the pullback we were looking for late last week, though it was shallower than we would have liked. We said last week that "we believe it will be a buying opportunity for a strong rally over the intermediate term."

As we mentioned last Tuesday http://greattrades.blogspot.com/2009/03/bought-back-ge-identifying-bear-market.html , 90% upside days following a series of 90% downside days is very bullish. Today we may have yet another 90% upside day.

So the intermediate term picture looks strong. However, the market is still very extended shorter term, so we will hold half our remaining short positions until there's a better buy opportunity.

Open Positions: 25% short S&P 500, 15% short financials, speculative traders short an additional 15% S&P 500, short financials an additional 20%.

With the S&P 500 testing the 800 level, our trading model is reshorting some of the S&P 500 and financials covered on Friday. Adding 10% S&P 500 and 10% financials, with speculative traders adding 10% additional S&P 500 and 10% additional financials.

Open Positions: 50% short S&P 500, 30% short financials, speculative traders short an additional 30% S&P 500, short financials an additional 40%.

With the big gap up almost 8%, our trading model sold the rest of the GE long position.

Open Positions: 40% short S&P 500, 20% short financials, speculative traders short an additional 20% S&P 500, short financials an additional 30%.

With GE closing under $10 at options expiration, the GE March $10 call options we sold for .30+ are expiring worthless.

For speculative traders who were able to buy back GE in the upper 9's, sell near the $11.20 open yesterday, and hold on to the short March $10 calls naked (i.e., not covered by long stock), that means a very nice gain of about 15% in two trading days. For the GE shares sold and calls bought back early yesterday, the gain was much smaller, but allowed room to add to shorts around the 800 level on the S&P 500. For the GE shares still held, the calls expiring worthless lowered the cost basis by .30+.

The GE call expiration, along with the partial covering of short positions today to lock in some nice gains, has significantly reduced the risk in our open positions and allows room to reshort in case of a market bounce. Still, because our open positions were nearly maximum short, they're still heavily short considering our more positive intermediate-term outlook, especially with speculative trader positions still leveraged short (over 100%, using margin or leveraged short ETF's).

Based on various indicators, including some we posted on Wednesday night, we believe there is more selling to come before this market pullback is over. Below are the updated hourly charts on the S&P 500 and financials ETF:




Both charts clearly broke down from rising wedges, with bearish divergences on indicators that moved lower while prices moved higher. Amazingly, the financials ETF closed today's after hours session down for the week, despite the strong 18%+ rally during the week. The triple-long financials ETF (FAS) closed the after hours session down over 4% on the week after rallying over 51% during the week. There was definitely some frothy action this week.

We plan to continue to scale out of shorts on further weakness, eventually getting back long when our indicators turn more positive. This has been a very interesting market, and should remain so in coming weeks.

With the 780 area holding so far today on an unpredictable quadruple expiration witching day, our trading model has covered 1/3 of the S&P 500 short to lock in gains.

Open Positions: 40% short S&P 500, 20% short financials, 5% long GE w/covered calls, speculative traders short an additional 20% S&P 500, short financials an additional 30%, short 5% GE March 10 calls.

Our trading model has covered the MET short in 20's for a quick near 20% gain from 25's. Also, covered partial on financials after a near 15% drop from yesterday's high. Locking in some big, quick gains.

Open Positions: 60% short S&P 500, 20% short financials, 5% long GE w/covered calls, speculative traders short an additional 30% S&P 500, short financials an additional 30%, short 5% GE March 10 calls.

With the opening gap to resistance, which we believe is an exhaustion gap for this rally, our trading model is adding to shorts. Adding 10% short S&P 500 and 10% short financials, while selling half of GE and covering the calls. Speculative traders can short an additional 10% S&P 500 and 10% financials and sell GE, leaving calls short naked.

Open Positions: 60% short S&P 500, 30% short financials, 5% short MET, 5% long GE w/covered calls, speculative traders short an additional 30% S&P 500, short financials an additional 40%, short an additional 5% MET, short 5% GE March 10 calls.

This weekend, we posted a number of charts with indicators illustrating how this recent low looks very different from other significant lows in recent history.

Yesterday, we posted a paper showing why this time may be different, and the recent low may have been a major market turn. If it is a major turn, the weekly and monthly charts are so oversold, the market could go a long way in a bear market rally or new bull market:

There are bullish divergences on the above weekly chart, with buy signals hitting or about to hit on that timeframe (keep in mind the week isn't over, so that can change).


In the weekend post, we also posted a chart showing that in the very short term, a pullback was likely because of a bearish rising wedge on the 60-minute chart and extended indicators. We got that very short-term pullback Monday afternoon into Tuesday morning to reset those indicators, and used that pullback to cover a portion of our shorts.

From the Tuesday morning low, the market rallied sharply on decreasing volume into a volume climax this afternoon on the Fed announcement, forming a new rising wedge:


The SPX rally also ran into resistance at January's low, the downtrend line from January's high, and the 50-day moving average. If this afternoon's spike was both a short-term volume and price climax, the S&P 500 should pull back in the short term to relieve the stretched technicals and resolve the bearish divergences.

The below chart of the Tick 10-day EMA readings shows that extremely high positive readings have previously preceded sharp selloffs:

The current level of the Tick 10-day EMA is extremely high, increasing the likelihood of a strong pullback very soon. The December 1 selloff doesn't look that sharp on this chart, but that one-day loss was one of the biggest in history, with the SPX down 9%. That selloff was later fairly quickly recovered, so if we do get a sharp selloff now, the same could happen this time.


Here's the updated $CPC Put/Call ratio (10-day EMA) chart, with the SPX (S&P 500) chart for comparison:


The 10-day EMA is now at a multi-year low, and as we said this weekend, based on recent history, it's "at a level that has preceded selloffs, not huge rallies. There's way too much call buying (usually a good contrary indicator) for us to be comfortable thinking that the market will have a huge rally from here."

Here's the updated NYMO chart, with the SPX chart for comparison:



We said this weekend that "It has room to go still higher, but it's starting to get extended on a historical basis" and "We still have a ways to go to get to" the levels at the November and January highs. Now, after the last 2 days of rallying, it has surpassed the November level and doesn't have much more room to go higher on a historical basis, since in Stockcharts' database, only in early January has it ever gone higher.


Here's the updated chart of the Nasdaq vs. the SPX over the last 8 years:

On the quick rally to 2.38, our trading model has sold out of FITB to lock in nice profits.

Open Positions: 50% short S&P 500, 20% short financials, 5% short MET, 10% long GE w/covered calls, speculative traders short an additional 20% S&P 500, short financials an additional 30%, short an additional 5% MET, long an additional 5% GE w/covered calls, short gold to hedge.

With the quick rise to next resistance near 800 after the Fed announcement spike, our trading model sold the long S&P 500 and is reshorting the S&P 500 as well as shorting MET over 25.

Open Positions: 50% short S&P 500, 20% short financials, 5% short MET, long 5% FITB, 10% long GE w/covered calls, speculative traders short an additional 20% S&P 500, short financials an additional 30%, short an additional 5% MET, long an additional 5% FITB, and an additional 5% GE w/covered calls, short gold to hedge.

With the pullback after the breakout over 780, our trading model is going long the S&P 500 for a rise to next resistance.

Long 20% S&P 500, long 5% FITB, 10% long GE w/covered calls, speculative traders long an additional 20% S&P 500, long an additional 5% FITB, and an additional 5% GE w/covered calls, short gold to hedge.

With the break to a new high, our trading model stopped out on the shorts and will look to reshort higher. Also, on its breakout to a new high, our trading model is now long FITB at 2.12.

Open Positions: Long 5% FITB, 10% long GE w/covered calls, speculative traders long an additional 5% FITB and an additional 5% GE w/covered calls, short gold to hedge.

On the retest of the day's high, after an apparent double top, our trading model is reshorting the 10% S&P 500 and 10% Russell 2000 we covered yesterday morning.

Also, we're selling March $10 covered calls on GE at .30+, which will either lower our cost basis by .30 or, if GE closes over $10 on Friday, give us a 3%+ profit in 2 days when options expire.

Open Positions: 50% short S&P 500, 20% short financials, 10% short Russell 2000, 10% long GE w/covered calls, speculative traders short financials an additional 40%, short an additional 20% S&P 500, long an additional 5% GE w/covered calls, short gold to hedge.

We had bought GE in the 6's less than 2 weeks ago, and sold it last week in the 9's. Here in after hours, we bought back GE in the upper 9's after it has consolidated its big gain the last few days.

The pullback in the market yesterday into this morning gave this rally additional energy to move higher. There are still some negative indicators on the market, as well as strong resistance close by for the S&P 500, but GE should hold up well on any pullback, and it may have set its bear market panic bottom around when we orignially bought it. It provides a good hedge against our remaining short positions.

As we said this weekend, "Whether the next pullback results in new lows or just a shallower correction, we plan on covering shorts and getting back long for what we expect to be a strong intermediate-term rally." GE is the first of the longs, in case the market breaks resistance and continues higher before the next pullback.

The reason we wanted to cover shorts on the pullback and get back long for a strong rally is that there are some strong indications that such a rally is either under way or will come after a stronger pullback. This award-winning paper,
Identifying Bear Market Bottoms and New Bull Markets, discusses the fact that major market bottoms are identified by a series of 90% downside days followed by 90% upside days. This is exactly what we've had in recent weeks, and it looks like today we had a 3rd 90% upside day of this rally.

Because of this major bottom signal, we were tempted to cover all shorts and get back long this morning after this first pullback. However, with negative signals still around, strong resistance close by, and the market very extended short term, we chose to cover partially and will stop out of the rest of the shorts on a breakout of resistance, or will cover on the next pullback. Also, there have been a number of both 90% up days and 90% down days in this bear market, so this signal doesn't mean the bear market is over.

Beyond the short term, we believe the signals discussed in this paper can outweigh signals that would normally be negative for the market. However, the market is very extended in the short term, so we still expect another pullback to start fairly soon, and it could be a sharp one, though the break of yesterday's highs means it may start from higher.

Open Positions: 40% short S&P 500, 20% short financials, 10% long GE, speculative traders short financials an additional 40%, short an additional 20% S&P 500, long an additional 5% GE, short gold to hedge.

With their break of yesterday's highs late in the day, our trading model stopped out of the Russell 2000 and Nasdaq 100 short positions reshorted/added today.

Open Positions: 40% short S&P 500, 20% short financials, speculative traders short financials an additional 40%, short an additional 20% S&P 500, short gold to hedge.

With the Russell 2000 up over 2.5%, after covering our Russell 2000 short when it was down this morning, our trading model is reshorting the 10% Russell 2000 that we covered this morning.

Open Positions: 40% short S&P 500, 20% short Nasdaq 100, 10% short Russell 2000, 20% short financials, speculative traders short financials an additional 40%, short an additional 20% S&P 500, short gold to hedge.

With the S&P 500 bouncing back over 760 and the Nasdaq 100 up over 1.5%, our trading model is adding 20% Nadaq 100 short.

Open Positions: 40% short S&P 500, 20% short Nasdaq 100, 20% short financials, speculative traders short financials an additional 40%, short an additional 20% S&P 500, short gold to hedge.

On this morning's drop back into the 740-750 support area, our trading model is covering the last short add from over 770 yesterday. We're locking in a nice, quick profit.

Open Positions: 40% short S&P 500, 20% short financials, speculative traders short financials an additional 40%, short an additional 20% S&P 500, short gold to hedge.

As we said this weekend, "we're comfortable being short here and adding on any strength early in the week." With today's early strength, there are more negative divergences showing up near 771 resistance, so our trading model is adding to shorts with the S&P 500 over 770 (SPY 77.6), over 100 points higher than the low on March 6.

The S&P rising wedge is nearing its apex, so the upside from here should be limited before a pullback starts. Adding 10% short S&P 500, 10% short Russell 2000.

Open Positions: 50% short S&P 500, 20% short financials, 10% short Russell 2000, speculative traders short financials an additional 40%, short an additional 20% S&P 500, short gold to hedge.

Here's the updated $CPC Put/Call ratio (10-day EMA) chart, with the SPX (S&P 500) chart for comparison:

You can see that the 10-day EMA is almost at a 52-week low, at a level that has preceded selloffs, not huge rallies. There's way too much call buying (usually a good contrary indicator) for us to be comfortable thinking that the market will have a huge rally from here.


Here's the updated NYMO chart, with the SPX chart for comparison:

It has room to go still higher, but it's starting to get extended on a historical basis. From this chart over the past 8 years, you can see that NYMO has rarely moved much higher:

However, the market is in unusually oversold territory now on a weekly or monthly basis, so we should be seeing higher spikes on bear market rallies, just as we saw in early November and early January. We still have a ways to go to get to those levels.

Here's a chart of the Nasdaq vs. the SPX over the last 8 years:

You can see that all the significant lows in both the Nasdaq and SPX have come after spikes down in the Nasdaq/SPX ratio, where the Nasdaq had been underperforming the SPX. Now, this ratio has spiked up, to a multi-year high, which has been a sell indicator in the past, not a buy indicator.

On the one hand, you could say it's different this time, as the recent Nasdaq outperformance has more to do with the collapse of the financial sector, which is much more heavily represented in the SPX than the NDX. Whereas the Nasdaq used to be where the speculative stocks were, now the financials are really the speculative stocks. You could also say the ratio has much more room to the upside, since it was much higher during the tech bubble 10 years ago, and last fall could have been the significant low, with last week's low just a retest.

On the other hand, this indicator when combined with the others above make it hard for us to be convinced that we're in for a huge rally from here. The daily price charts and some other indicators make us think there's a lot more upside potential, but these indicators give us pause.

Here's one of the daily price charts that indicate there's a lot more upside potential, the NYSE Summation Index (cumulative NYMO):

NYSI is coming off an extremely negative level, and has lots of room to move on the upside. However, it also has room to move on the downside if NYMO turns around.

In the very short term, there's a bearish rising wedge on the 60-minute chart, and PPO is at a level that has preceded strong selloffs in recent months:

Maybe, because the market is so oversold on the longer timeframes, the next pullback won't be so sharp, and it will continue much higher after resetting some of these indicators. However, for the time being, we're comfortable being short here and adding on any strength early in the week. Whether the next pullback results in new lows or just a shallower correction, we plan on covering shorts and getting back long for what we expect to be a strong intermediate-term rally.

With the S&P 500 testing the 760 area, our trading model is adding to shorts, with an additional 20% short S&P 500 and 10% short financials. Speculative traders can also add an additional 10% short S&P 500 and 20% additional short financials.

Open Positions: 40% short S&P 500, 20% short financials, speculative traders short financials an additional 40%, short an additional 20% S&P 500, short gold to hedge.

With the S&P 500 reaching the 740-750 resistance area, we're selling our longs and restarting our shorts.

Open Positions: 20% short S&P 500, 10% short financials, speculative traders short financials an additional 20%, short an additional 10% S&P 500, short gold to hedge.

With the break of yesterday's high followed by a relatively shallow pullback, our trading model has closed out short positions and gone partially long. Despite weakness overseas, the market is acting very strong. We don't believe the rally has far to go, so we're keeping the position size small.

Open Positions: 20% long S&P 500, speculative traders long an additional 20% S&P 500, short gold to hedge.

On the early strength, our trading model added to shorts, with an additional 20% short S&P 500 and an additional 20% short financials. Speculative traders can also add those same additional amounts to get heavily leveraged short.

Open Positions: 40% short S&P 500, 30% short financials, speculative traders short financials an additional 40%, short an additional 30% S&P 500, short gold to hedge.

Here are a couple of indicators showing why our trading model sold longs and reversed to short this morning.

This chart shows the CBOE Put/Call ratio's 10-day moving average:

You can see from this chart that the 10-day EMA of the Put/Call ratio is at a level normally seen at market tops, not bottoms. We've never seen a market bottom with such low Put/Call ratios.

Here's the NYSE McClellan Oscillator (NYMO):

Although the rally only just started, NYMO is already in overbought territory per 5-day RSI and stochastics. One down day could trigger new sell signals, which would likely lead to new market lows fairly quickly.

While the price action yesterday and today has been constructive, indicating potential for more upside, these indicators and others (e.g., record high closing TICK reading yesterday) point to likely renewed selling coming up. Considering we're in a bear market, with the primary trend being down, we'd rather err on the cautious side when many are proclaiming that the bottom is in. Instead of staying heavily long, as we were during yesterday's huge rally, we currently plan on adding to shorts on any further upside or on confirmation of sell signals.

Open Positions: 20% short S&P 500, 10% short financials, speculative traders short financials an additional 20%, short an additional 10% S&P 500, short gold to hedge.

With the retest of the day's high, our trading model has started a short on the market, 20% on the S&P 500 and 10% on financials. Speculative traders can short an additional 20% financials and 10% S&P 500.

Open Positions: 20% short S&P 500, 10% short financials, speculative traders short financials an additional 20%, short an additional 10% S&P 500, short gold to hedge.

With this morning's rally, our trading model is selling the rest of our long positions to get to cash.

Open Positions: Speculative traders short gold to hedge.

On today's huge rally (particularly in financials, which moved up over 15% today alone), our trading model has taken profits on half of our long exposure. With yesterday's add, we were very heavily long and are happy to take nice profits in this difficult bear market to get to a more appropriate allocation for a countertrend rally in a brutal bear market.

GE and BAC in particular had very nice moves in just 3 trading days, with GE moving from the upper 6's to the upper 8's and BAC moving up over 50% from the low 3's to the upper 4's. HIG also had a nice move today, up over 25%.

Open Positions: 20% long S&P 500, 5% long financials, 5% long GE, 3% long HIG, 3% long BAC, 3% long PTV, speculative traders long financials an additional 20%, long an additional 10% S&P 500, short gold to hedge.

On today's gap down, our trading model is adding to long positions. Added 20% more S&P 500 and 10% long financials, with speculative traders adding 20% long financials and 20% more long S&P 500.

Financials remain a very high risk sector, but we believe the bigger risk at this point is to the upside. The government may intervene at any time, but we believe there's potential for positive intervention soon.

Open Positions: 40% long S&P 500, 10% long financials, 10% long GE, 5% long HIG, 5% long BAC, 5% long PTV, speculative traders long financials an additional 40%, long an additional 20% S&P 500, short gold to hedge.

With the market giving up all of yesterday's gains and more, our trading model is taking profits on our S&P 500 short (SPY 70.1) and taking trading long positions in the S&P 500, GE under 7, HIG in the lower 4's, BAC in the low 3's, and PTV in the mid-11's. Speculative traders can go long financials 20%. We still don't think the bottom is in yet, but there could be a sizable bounce soon.

Open Positions: 20% long S&P 500, 10% long GE, 5% long HIG, 5% long BAC, 5% long PTV, speculative traders long financials 20%, short gold to hedge.

On the big gap up this morning, our trading model is adding 25% short to get to 50% short the S&P 500. Based on our indicators, we don't believe the bottom is in yet.

Open Positions: 50% short S&P 500, speculative traders short gold to hedge.

With the S&P 500 unable to hold the 700 level at the close, after a weak bounce, our trading model reshorted the S&P 500 25% (at 70.22 SPY) to get to the same allocation as before today.

Open Positions: 25% short S&P 500, speculative traders short gold to hedge.

On the bounce near 710 S&P 500 (SPY 71), our trading model moved back to cash. The expected bounce has come, but it's not clear how far it will go before the selling resumes. In this dangerous market, cash is king. Took a profit on the S&P 500, small profit on GE, small loss on HIG.

Open Positions: Speculative traders short gold to hedge.

Now that this morning's big gap up has filled, our trading model has gone long the S&P 500 for a bounce (SPY 70).

Open Positions: 25% long S&P 500, 5% long GE, 5% long HIG, speculative traders short gold to hedge.

With the dip back under 705 on the S&P 500 (SPY 71), our trading model has covered our remaining short position.

With GE oversold at 7 and HIG back down to 5, our trading model has taken positions in these two stocks.

Open Positions: 5% long GE, 5% long HIG, speculative traders short gold to hedge.

With the S&P 500 dipping below 705 (SPY below 71, XLF under 7.10), our trading model is taking more profits on shorts. We're reducing to 25% short the S&P 500 and covered the financials short, with speculative traders covering the extra shorts.

Open Positions: 25% short S&P 500, speculative traders short gold to hedge.

With financials down over 5% more (XLF 7.2) and the S&P 500 down another 2.5% (SPY 72), our trading model is taking partial profits on our heavy short positions. We're reducing to 50% short the S&P 500 and 10% short financials, with speculative traders reducing the extra S&P 500 short to 10% and the extra financials short to 15%.

We've had some huge gains on these short positions in just 2-3 trading days, so we're locking in some gains here. We're also lowering stops on the remaining short positions to 730 S&P 500

Open Positions: 50% short S&P 500, 10% short financials, speculative traders short another 15% financials and 10% S&P 500, short gold to hedge.

It was a horrible week for the stock market, as the Dow and S&P 500 both broke their November lows, but it was a great week for trading. Our trading model not only got long for the big one-day bounce-back rally, but also got heavily short for the ensuing selloff when S&P 500 780 resistance held. Also, it got long for the very nice rally in oil and got short/hedged gold at the peak in gold.

Not including the February 3 intraday long for 200+ Dow points, and not including the short gold hedge from the exact peak day so far, below is our trading model's performance based on a hypothetical $10,000 account and our blog posts, with growth to $11,458, or 14.6%, vs. the S&P 500's -18.6% return on the year so far:

Speculative traders, using a separate hypothetical $10,000 account for calculation, were able to make an additional 16.4%:

Commissions are not included in the above calculations, nor is interest credited for cash or interest charged on any margin. Closing prices were used for most trades, and approximate intraday prices for intraday posts. When our trading model stopped out and re-entered very close by, we counted it as just holding the position rather than increasing our calculated returns from those very fast actions.

At this point, the market is very oversold, but our trading model indicators are not hitting the bounceback levels they were hitting before last Tuesday's bounceback rally. That rally reset our indicators, allowing the market to continue lower. In a normal market, the bounceback rally would have started earlier and lasted longer, so this market action has been particularly weak.

Given the current market conditions, the best position for our trading model at this time is to remain heavily short with a relatively tight stop until our indicators hit bounceback levels. With the primary trend bearish, we need to remain cautious when taking on long positions until the market puts in a clear reversal.

Open Positions: 70% short S&P 500, 25% short financials, speculative traders short another 30% financials and 20% S&P 500, short gold to hedge.