Last October, when the market was racing higher, I published a piece called “Are We on a Ticking Time Bomb?” where I laid out exactly where I thought the market would top. At the time, the major indexes were ripping and everybody was all-in. Some of you agreed with me, plenty of others thought I was nuts.
Turns out, the market topped right where I said it would.
Then, on January 27, after the market made a comeback, I published another report, “Conditions May Be Shifting...,” warning that the rally was a trap and that the prior highs would hold. I told Reddit not to chase.
The very next day, the market peaked and aggressive selling kicked in.
Once again, the market is rallying, and I think another top is in. Round three. And frankly, this setup might be the cleanest one yet.
April was massive month. Stocks ripped across the board and sentiment flipped from fear to greed in just a few weeks. But I’ve been doing this long enough to know what real market strength is and what a fragile market looks like.
This is what I am seeing…
Sector Rotation
Most don’t take the time to look at this, but it’s one of the most reliable ones. I always keep an eye on how consumer discretionary stacks up against consumer staples. It’s a simple question: are consumers spending because they’re confident, or are they just buying the bare necessities?
Right now, staples (XLP) are gaining ground on discretionary (XLY). That’s institutional money rotating into safe havens. The smart money crowd is often early on changes in trend, and they think the party isn’t going to keep going.
There are a few more diverging sectors as well, such as transports lagging industrials, which tells me that goods are being produced, but shipping those goods is starting to slow down.
The bottom line, cracks are starting to form.
Volume Tells the Real Story
Sure, the market’s been rallying, but we need to look at what’s driving it.
The volume on QQQ during this entire move has been light, to put it politely. A real rally with conviction should be backed by strong participation. Instead, we’ve got a move built on partial participation. That doesn’t mean buyers don’t believe in it. It means the sellers just haven’t shown up yet.
We saw this same pattern in December. Light volume on the grind up, then the bottom fell out. The difference this time is that it’s been going on longer, which usually means when sellers finally do step in, the drop is powerful.
Put/Call Ratio
This is one of the oldest contrarian signals in the book and it still works great. When the equity put/call ratio dips below 0.55, you know the crowd has gotten too comfortable. Everybody is piling into call options, convinced the party will go on forever.
Today the put/call ratio is sitting at 0.46. That is very low, and that is frequently where the market turns around. Plus, the market has a nasty habit of punishing the maximum amount of people it can. When a crowded trade unwinds, the market can move very quickly in that direction. That’s where huge moves come from, not when everyone is right, but when everyone who’s wrong has to get out at the same time.
Market Breadth
Whenever the market pushes higher and everything seems good on the surface, you always want to pop the hood and check whether the engine is actually running or if it’s just coasting on fumes. The advance-decline line helps traders understand this. It tracks how many stocks are moving up versus going down. When the line is up, the majority of stocks are heading higher. When the line is down, the majority is selling off.
Over the past couple of weeks, the A/D line has been trending lower even as all the indexes have pushed to new highs. That’s a problem. It means a handful of mega-cap names are doing all the heavy lifting while most stocks are already rolling over.
This is textbook stuff. The market looks strong on the surface, but the mid and smaller-cap names are already starting to trade off. Historically, when the A/D line starts to fade, but the indexes trade higher, it soon will come crashing down.
Elliott Wave Structure
Now let's get a little technical. Here’s the wave count on QQQ on the hourly chart..
What I’m seeing is a textbook 5-wave impulse that looks like it’s either complete or very close to completion. There might be one more slight push higher early in the week, but the structure is mature.
When measuring impulse waves, you will often notice that wave 1 and wave 5 travel the same distance. So if you project the length of wave 1 onto the wave 5 starting point, as I did with the green boxes, the measured move lines up almost perfectly with where we are now.
Also, notice that both the RSI and the ROC are showing bearish divergence, meaning the price is hitting new highs while the oscillators continue to make lower highs. This is another signal of exhaustion.
Gann Time Cycles
I know the Gann analysis isn’t for everyone, and that’s fine, it generally delivers for me, so I keep using it. But whether you believe in it or not, the natural date clusters have a funny way of lining up with market inflection points. The next window falls between May 3 and 7, which means we are likely going to change direction this week.
This is just another indicator that we are topping out here.
Bottom Line and Trade
Nothing is guaranteed, but I've been doing this for over 25 years. I have a pretty good track record of predicting when the market's going to start petering out.
When you’ve got sector rotation flashing defensive, volume drying up, put/call ratios at extremes, breadth falling apart, a completed wave structure, and a Gann time window all converging at once, that is a lot of confluence indicators.
And I haven't even started talking about Iran and the oil dynamics, liquidity, or any of the other possible scenarios that could help take down this market.
On Friday, I started selling SPY Jun 30 745/755 call spreads for $3.20, which gives me a bit of a cushion in case I am off on my timing.
This week, I will be aggressively adding puts. Top contenders include QQQ, DELL, KEYS, CAT to name a few.