It is time for the market to put up or shut up!

Many of the indicators that I look at suggest that the markets are at an inflection point. For example, some of our shorter measures of investor sentiment from the Rydex data series have gotten so extreme that they are suggesting there can only be only two outcomes to the current volatile trading range. Either the market will go strongly higher or we should have a waterfall decline. There is nothing insightful to analysis that says we will go higher or lower, but the point is that the resolution to the current volatile trading range should occur soon and the move should be substantial. The direction just isn't known.

If I were to put numbers or probabilities on to which scenario is most likely, it would probably be 80% resolution to the upside and 20% resolution to the downside. That is what history would tell us, and identifying what the outcome will be is only a guess in my opinion. Furthermore, I don't think you need to know what the outcome will be to survive in the market. It is more important to understand what is happening and then take action.

Figure 1 is a daily chart of the S&P Depository Receipts (symbol: SPY) going back to the bear market top in October, 2007. The red dots are key pivot points. Look to the right hand edge of the chart and the cluster of 3 pivot points. A close below three pivots is only seen in a bear market. The low pivot here comes in at 112.58. So if we close below this level, we should see continuation of the bear market for equities. The alternative is that this level will hold and prices will move higher.

Figure 1. SPY/ daily

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In summary, I see the equity markets at a pivotal juncture. The three pivots will either be the bottom or prices will head significantly lower.