Cautionary flags seem to be waving in both directions this week: Perspectives from technical experts Todd Salamone and Rocky White at Schaeffer's

Here's reading I can recommend at the beginning of each week, especially with reference to the sentiment outlook (with the volatility index (VIX), put/call ratio and related information); and other technical analysis sometimes included. The Monday Morning Outlook article today at Schaeffer's Research site is entitled "After a Long Winter, the Bulls Have the Momentum; Earnings, autos and banks still weigh on traders". And Todd Salamone's piece within that is entitled, "What the Trader Is Expecting in the Coming Week: Upside Bias Could Return With Post-Expiration Week Headwinds Blown Out". He posts a chart with 30-minute bars of the S&P 500 (cash SPX) with a trendline under the "clear pattern of higher lows going back to March 17" (same trendline included in one of Andre Gratian's short-term charts posted yesterday) and states: "The trendline support that connects these higher lows is currently sitting in the 840 area as we enter this week's trading."

He then goes on to say:

Market uncertainty prevails, and as I said last week, "Admittedly, it is a situation that is difficult to handicap, and this is why we continue to hammer home the point of having exposure to both sides of this market."

The risks to the bullish market momentum have not changed from last week. I'll quickly review a couple of risk factors:

1. The 10-day moving average of the all-equity International Securities Exchange (ISE) call/put ratio continues to roll over from optimistic extremes, consistent with levels that existed following bear-market rallies in May 2008 and January 2009.


2. The CBOE Market Volatility Index (VIX – 36.82) bounced higher from potential support at its 80-week moving average, currently situated at 33.56. A continued rise in the VIX would likely be coincident with higher SPX volatility stemming from an SPX decline. A positive is that the VIX high during the past week occurred around the 40 area, which is half the closing high in October and November 2008.

Support on the SPX resides around 840, as discussed in the opening of this report. Should 840 break, the 800-815 area would be the next support area, as the 80-day moving average is located at 815 and major options-related put support resides at the 800 strike. Potential resistance can be found at the declining 160-day moving average, situated at 884.13, and the round-number 900 level.

Read the full article for more on his perspective and recommendations. I do find it interesting that the 160-day MA that he likes to use, is right at that .786 Fibonacci retrace to the January 6 high (just under 944 SPX) that I've had in mind for quite a while - in case we do see the market find support and bounce yet again.

If you go on to read page 2 of the article, you'll find a piece by Rocky White (senior quantitative analyst at Schaeffer's) entitled, "Indicator of the Week: Short Interest & the Short Interest Ratio". He describes:

The rising short interest (along with average daily value) signals that the big money hedge funds are getting back into the market. However, as those hedge funds are going long the market and adding short hedges, the short-only players (those who are speculating on a market decline) are covering their positions. This short covering has added some fuel to the recent rally. However, it could mean the market is more vulnerable on the next pullback if the hedge funds stop buying and are quick to get out of their recent positions, especially if the short-only players are ready to get back into theirs. As Bernie put it, "This is bullish for the market while it lasts, but there could be a major price to pay for the dissipation of this unhedged short interest on the next pullback, as short-covering support will have been seriously compromised. And this phenomenon could also contribute to the rally's ultimate demise if the unhedged shorts decide to stick their toes back in the water and re-establish positions."

Again, I recommend reading the full article (including Rocky White's neat charts). As always - careful out there, and happy market navigating!