First let’s spend some time talking about sentiment. It’s important to understand how to read it, and more importantly, to understand that although it is a signal, there is no exact timing mechanism to it. Just because a certain reading is attained doesn’t mean the market suddenly will fall the very next day. It seems to need a catalyst, which will always appear when you least expect it, before it can start rocking. It means the market is vulnerable but only that. When that certain piece of news hits, the vulnerability kicks in and down we go.

Last correction was a very nasty 9%. Painful if you were caught in it. We were not, fortunately. Let’s get in to how to read it. The golden red flag seems to pop up historically when there is at least a 35% DIFFERENCE OF BULLS TO BEARS. Does it mean we drop at 35%? NO! It means we are on guard at that point. With the spread now at 35.9% you have to be very on guard for the selling to kick in. Again, no way to know when. 37.5% was the lucky winning spread for the bears last go-around. Never use sentiment alone as a sell indicator. It simply tells us the market is very vulnerable to any bad news to get hit harder than it had been in the recent past when sentiment was not an issue.

Let’s now discuss where the market will struggle if certain levels are lost. The Nasdaq had a strong gap up from 2480 six days that ran up. The gap has been filled, but not taken out, to the down side. If that level were to be taken out to the down side on a closing basis, and with some force, not just 2479/2478, it would be a bad sign for the bulls short-term only. The bulls are going to fight very hard at this level for they know the consequences if lost. For the S&P 50, there are multiple tails at 1185. Good strong horizontal support for the near-term. Also, the 20-day exponential moving average is at 1187. These levels are 2% away but can be visited very quickly if we get a gap down that runs and there is that very threat for tomorrow morning. If that level is lost, it opens the door to deeper selling down to the 50-day exponential moving average at 1160. We know how powerful 1151 is but the 50-day should be the very worst of things for now.

Coming in to today we had a confluence of headaches to deal with. First of all, we had negative divergences on the daily charts on many of the oscillators such as the MACD. That’s a headache unto itself, but when you add in another run at 70 RSI’s, which means overbought and you throw in some frothy sentiment numbers, things were not set up to explode higher. Yet, after a move up early on, the market held there for the rest of the day. It spent some time trading above then open and some time below but when all was said and done, it held pretty much where it opened. Impressive to say the least since this market does need to sell deeper. We held but after hours we have some really bad earnings reports from some big boys and girls such as eBay Inc. (EBAY), Cree Inc. (CREE), QUALCOMM Inc. (QCOM), Greenhill & Co., Inc. (GHL), and others. Futures are down pretty good and thus it will be very interesting to see if things accelerate to the down side over night or if things level off some.

Many times, when a market is topping, you get subtle signals from leading stocks that start to crack once their earnings come out. Even though they’re great reports, the stocks are full and they fall hard with gap downs in their pattern. That makes a move back up very difficult until they can sell deeper to unwind fully those overbought and lofty oscillators. Unless these stocks make some huge recoveries tomorrow, they will have a tough time and the more leaders you remove the harder it is for a market to continue to rise day after day. We are in a confirmed bull market for sure but there are some signs that this market will need to start selling some in the weeks to come. I don’t think it will be anything dramatic. Not at all but be prepared for a much tougher environment for some week. Patience will be needed or you will likely have a very tough time, whether you go long or short.