Shifting About In A Lower Range.....Froth Completely Gone

It seems like a long forgotten memory. The bull-bear spread each week reporting ridiculous numbers with regards to complacency. Froth out of control as week after week we saw numbers over 30% on the spread with a very high number of readings actually above 40% with the most recent high being 46%. That's just totally out of control. That froth could be seen in the monthly charts, which were totally out of control as well. Oscillators at extreme levels to the up side. The Nasdaq-spending is slightly over two years at 70+ RS1 on the monthly chart. Seems almost impossible, but the Fed Yellen did her magic once Bernanke set the ball in motion, allowing our markets to stay on the path to complacency. At some point I warned it would all have to go away with readings down below 10, and possibly below zero. We ended last week at 1% on the spread. Yes, I said 1% as fear, and, thus, action took over. Fear ramping up as the market stalled and then spiraled lower.

The stalling allowed it to slowly unwind but it was occurring. The collapse from 2134 to 1867 completed the job. 1% but that number was as of the close last Friday. Yesterday we saw the market get smoked. Really smoked, thus, for sure, we came in to today at least at a negative number on the spread. It may not end the week that way depending on the action to come tomorrow and Friday, but for sure we are in negative territory right now. It tells me the first major road block for this market has completed its journey, although make no mistake about it, the number can go quite a bit lower first. That said, we can at least acknowledge that froth is no longer an actual problem for the bulls to deal with. Enough of them have gone away while we have added quite a few new bears. The bulls went from a high of 62% down to the current reading of 27%. The bears have doubled from 13% up to the current reading of 26%. Above 30% would be awesome, but I won't get too cute here. The job has been completed in terms of eradicating froth. The bulls can double check that off the worrisome list. With fear taking over for the most part, trust won't come back easily, thus, it will be very tough to get the spread back to being at a too bullish level once again any time soon.

The other major headache facing this market has been those grossly overbought, monthly-index charts. Oscillators at ridiculously overbought levels across the board with the Nasdaq, having had two-plus years at overbought RRS1 readings. They are starting to unwind nicely, but could use quite a bit more unwinding to make things right again on the chart. To get things back to a neutral readings would require one of two events. Either a very long time lateral move that slowly unwinds things or the next big leg down to get it done in a more rapid fashion.

If we blast back up from here the unwinding will be very incomplete and likely lead to even more severe negative divergences, but you never know in this market since froth is gone. In a perfect world we'd unwind those monthly-index charts quite a bit more to make buying far safer. Clearing back through 2040 on the S&P 500 would bring in the big buyers, and I think that would hurt those charts longer-term, so I would think that level will remain very difficult for the bulls, but again, you never know for sure. Healthier would equate to more frustration for the bulls for the short- to middle-term.

For now, the action is quite clear for everyone to see. The S&P 500 broke badly below 2040, and has set up a new range for all to focus on. The first range in the bear flag currently forming is 1867 on the down side with 1993 being the level on the up side. Beyond 1993 we have the back test level at 2040. That can always be back tested if the market gets hammered again, and things get, believe this or not, too pessimistic. One more large leg down would likely lead to a very powerful counter-trend rally, but we don't know if another leg down is in the cards yet.

For the moment, we're in a triangle in the lower base that has currently set up meaning the market isn't much fun for the moment, but it is what it is and you must not ignore what's taking place, because you want things to be different. We watch the current range for more information. 1867 to 1993. If we can break below 1867 for another leg down, I do believe we'll see a powerful rally shortly, thereafter, once we get the proper bottoming stick or proper set of oscillators. A day at a time in a still very risky environment.