5/6/2014 5:41:05 AM

Good morning Traders,

Monday brought us a gap down followed by a rally back to highs. This pattern can be bullish, but bigger picture we have the dollar taking a hit in the futures market. This dollar weakness can be concerning, but so far markets are shrugging it off. Today we will take a look at sentiment and some McLellan oscillator data:

Generally speaking, when bearish sentiment is building (heading lower) it results in a move lower in the market. The longer that sentiment builds without being reflected in price action, the more bullish it can be. The fact that the SPY is STILL hanging around near highs is bullish. But that can break at any point. So let's look behind the sentiment.

I'm a big fan of data telling the story and NOT the news. So let us look at the NYSE a little more closely:

This view of the McLellan oscillator is bearish as it sits below zero. So the question is, if the market breaks lower here, will there be more damage in the NYSE or the Nasdaq?

Note there are a couple of interpretations of this data. First is the positioning above and below zero as being bullish or bearish. Next is if the indicator settles above or below. So a reversal lower may not be bearish as it could hold above the zero level.

Now the above looks at breadth, how about if you apply it to volume?

We see that volume is confirming here on the Nasdaq. That head and shoulder's pattern is looming though...

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And finally, the barometer, which drives our advice in the DSB:

So we remain in Buy Mode, cautious that today is a key reversal date. Also cautious that the crowd is no longer calling for a correction, which leaves the market even more exposed to one. We'll have more on that later in the week as tomorrow we start publishing our key weekly indicators.

Good trading!