We have been cautiously optimistic of the recent market rally from the June lows. However, never did we signal an all clear was at hand. In fact, we suggested a warning flag last week as the indexes "doji'd" right at the upper trend line.
After this past week's miserable price action we have more information about the current market, and it is pointing lower. Indicators have started to roll over, too. The Relative Strength Index (RSI) failed to break out past 50 while the Traders Dynamic Index (TDI) (bottom pane) is rolling over on this weekly chart, below.
The TDI is an efficient indicator created by Dean Malone that uses several other factors to find good entry and exit points. It uses RSI, moving averages and Bollinger Bands (three of my favorite indicators) and crossover moves to identify trigger levels to purchase or sell. When the green and red lines cross (above or below) they are very strong signals at the confirmation point (second straight move in the direction of the trend). The yellow and red lines crossing gives us a much better buy/sell signal than other indicators; we look for those very closely as they are reliable.
Notice I labeled two lines on the chart as areas of interest, 3950 and 3350, on the S&P 500. After Friday's selloff we're seeing much lower prices than two weeks ago, and there's likely to be some spillover. Look for those levels and perhaps lower to be tested down the road.
Caution again is warranted, so keep lots of cash and protection working at all times.