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Vertical price moves signal that a bubble mentality has taken over the market (the market in AAPL, not necessarily the entire stock market), and bubbles almost always end badly. When prices finally turn down, they usually drop as fast as they went up.

While we can be pretty sure of the outcome, we have no way to know at what price the final blowoff top will arrive. In a recent headline someone was predicting the AAPL would go to 850. Well, that is entirely possible, but who knows? At this point, one thing we know for sure is that where AAPL is concerned, rationality "has left the building." Use extreme caution from here out. Think housing bubble -- to the majority of investors the reasons it could never end seemed bullet proof at the time.

Is a price collapse the only possible outcome? Actually, no. Occasionally, parabolic stocks can enter what is called a "high-level consolidation," which is where price begins to move in a sideways trading range for several years. This has the effect of digesting the excesses of the previous advance. For example, if this were to happen now, the consolidation might have a range of between 400 and 600, and run for five to ten years. Emphasize, this is just an example, not a prediction.

Another area of concern is AAPL's effect on stock indexes of which it is a component -- the SPX, OEX, NDX, and XLK to name a few off the top of my head. These are all capitalization-weighted indexes, and AAPL has such a large market capitalization it has a strong influence on the performance of these indexes.

The Nasdaq 100 (NDX) provides us with a great example. The QQQ reflects the performance of the cap-weighted version of the NDX. Thanks to AAPL, the QQQ has moved about 10% above the resistance line drawn across the July 2011 top.

The QQEW ETF is the equal-weighted version of the NDX. Note that it has barely moved above the resistance line, because AAPL has the same weight as the other 99 stocks in the index.

Conclusion: AAPL has entered a dangerous vertical phase. We can only guess where the final top will be before a major correction or collapse begins, but extreme caution is warranted from here on. While you may not be involved with AAPL directly, be aware that radical moves by AAPL will also have an inordinate affect on cap-weighted indexes of which it is a component.

On the chart below we can see that the Ratio has reached the highest level in 10 years, which shows an unusually high level of bullishness on the part of Rydex investors. Based on previous Ratio tops shown, we can assume that prices are likely to correct or consolidate at the very least.

Digging deeper into the numbers, the following chart shows that Money Market Assets are near 10-year lows, which indicates that Rydex investors have very little money on the sidelines with which to make an additional commitment to bullish positions. Also, Bear Fund Assets are near 10-year lows, demonstrating that Rydex investor expectations for bearish outcomes is very low. These bullish attitudes are bearish for the market because it appears that there are very few resources left to fuel a continued price advance.

When we analyze Rydex assets we assume that this tiny slice of the market more or less represents what is happening in the broader market. This may or may not be the case. For example, Rydex investors could have other cash reserves located somewhere other than in the Rydex system. Nevertheless, Rydex asset analysis appears to be a useful addition to our technical toolbox.

The market rally on Wednesday was driven in part by a surge in housing stocks, which was triggered by a favorable housing report. Since the fundamentals of the housing market are not too thrilling, regardless of short-term gains, my curiosity was piqued and I pulled up some charts.

The daily chart of the Dow Jones US Home Construction Index, which is one of a set of 100 Dow Jones US sector indexes we track, shows that Wednesday's rally was a small extension of a +78% up move that began after the Index hit rock bottom in October 2011. This is good but how does this rally present in a larger perspective?

I would normally zoom back to a weekly bar chart, but in this case the monthly bar chart is much more helpful, and the current rally looks rather insignificant compared with what has gone before. First, between 2000 and 2005 there was a parabolic advance of about 1,000%, perfectly depicting the frenzy of the housing bubble. Then between 2005 and 2008 we can see all the air coming out of the bubble. Since the bottom in 2008, the Index has entered what is called a basing pattern, and it typically becomes a "long base" because it can go on for many years.

Bottom Line: The purpose of the base pattern is to work out the excesses of the parabolic rise and collapse that preceeded it, a process that normally takes many years to complete. The range annotated on the chart probably represents the range of movement for the Home Construction Index for the next decade or more. There is money to be made playing the range, but I don't expect the top of range to be significantly exceeded any time soon.

After reaching an all-time high in August, gold has corrected about -18%, but a recent bounce prompts us to take a closer look to see if the correction could be over. The most encouraging technical evidence is on the weekly chart.

Note how the recent low occurred just above the long-term rising trend line. From the beginning of the correction I thought that this trend line was a logical downside target. Whether or not the bounce off this line is the beginning of a new up leg destined to take out the August highs, has yet to be determined.

The fact that the support has held is very positive, but the weekly PMO (Price Momentum Oscillator) configuration is still negative -- falling below its EMA, and still somewhat overbought.

Shorter-term the daily PMO below is oversold and has bottomed, but the price line has encountered resistance at the 200-EMA.

Our Trend Model for gold is currently neutral (in cash or fully hedged), and a new buy signal will not be generated until the daily 20-EMA crosses up through the 50-EMA. That will probably take a few weeks if prices continue to rise.

Bottom Line: The correction has been of sufficient depth and duration that the bounce off long-term support presents a short-term buying opportunity for those anxious to exploit the next leg up, assuming that there will be one; however, not enough tumblers have fallen into place to justify anything but very tight stops.

On the daily bar chart below we can see that the rising bottoms line has been penetrated at the time this intraday snapshot was taken. This is not a decisive break, but it is a logical one, since the triangle formation is a continuation pattern, and a continuation of the larger down trend should be expected.

To determine if the October low has historical credibility as long-term support, let's look at monthly chart going back to 1943. As we can see, the long-term support is just above 2%. Hoisington Investment Management Company in their Third Quarter 2011, Quarterly Review and Outlook stated, "In view of the United States extreme over-indebtedness, we believe that 2% is a an attainable level for the long treasury bond yield."  Technically speaking, 2% looks attainable and likely.

Why would anyone want to commit their money for 30 years at 2% to 3%? Because U.S. treasuries are considered to be safer than other options, which is amazing given that we are borrowing 42 cents of every dollar we spend. Doesn't sound safe to me. I guess it speaks more to the sorry state of the global economy.

The US Dollar Index appears to be setting up for a medium-term double top. This week it broke down through a short-term rising trend line drawn from the October low after reaching a level equal to the October top. The PMO made a lower top, creating a negative divergence.

The 20-EMA crossed up through the 50-EMA in early September, generating a Trend Model BUY signal. The 50-EMA crossed up through the 200-EMA signaling that The Dollar Index is now in a long-term bull market. Since the EMAs are in a bullish configuration, it is less likely that a full bearish outcome will transpire, but we could see a decline to suport at the 200-EMA or the rising trend line drawn through the August and October lows.

The Weekly chart presents a positive picture with a rising PMO and positively configured EMAs.

Bottom Line: The Dollar Index has been particularly vulnerable to the alternating extremes of attitude within the investing community of panic and relief brought on by the global debt crisis; however, while the charts refelct this volatility, they also seem to reflect a tendency toward a positive outcome in the long run.

A positive aspect to the price breakdown is that a number of ultra-short-term indicators hit climactic oversold readings the same day. On the chart below we can see how these oversold spikes generally coincide with the start of rallies of at least short-term duration.

Climaxes are a sign of either initiation or exhaustion. An initiation climax signals that price will begin moving in the direction of the climax, while an exhaustion climax occurs at the end of a move. Immediately following a climax, prices can chop around for a day or two before the followthrough begins.

The question, of course, is what kind of initiation is this one? With an intermediate-term buy signal in effect, we look for a bullish interpretation, which would be that the breakdown was actually a shakeout, intended to turn people bearish just ahead of a rally. Unfortunately, we are still on a long-term sell signal, which means things could be about to get nasty again.

Another negative is that intermediate-term indicators (see chart below) are still overbought and need to move to at least the neutral zone. As you can see on the chart, this can happen without accompanying price deterioration about half the time.

Bottom Line: The market just failed a test by breaking down out of the triangle formation, but the technical damage is not serious, and a decline to the 1175 area to clear intermediate-term overbought conditions could be absorbed without major technical damage being done. On the other hand, if the ultra-short-term oversold spikes have produced sufficient internal compression, yesterday's breakdown could prove to be the final shakeout preceeding a new rally. In any case I view the recent decline as a correction within the rally that began in October.

Over 10 years ago I developed an indicator called Dollar-Weighted Volume (DWV). It could be that I reinvented the wheel, but I am not aware of anyone else who uses this indicator. DWV is variation of On-Balance Volume (OBV), which was developed by Joe Granville. DWV is calculated by multiplying the daily volume of each stock in a given market index by the closing price, then adding (or subtracting, if the stock closes down) the result to the cumulative total of DWV for the index. The resulting indicator is an expression of the trend of money rather than just volume.

DWV is a short-term indicator. On the chart below we show the SPX version, and you will note that the DWV and the price index run pretty close together, with tops confirming tops and bottoms confirming bottoms. What we look for are positive/negative divergences and for instances where volume doesn't confirm price, meaning that volume either leads or lags price. When this happens, look for a change in the short-term price trend.

The annotation on this first chart shows how DWV failed to make a lower low along with price (negative divergence), indicating that DWV was beginning to dry up during the selloff.

The annotations on the next chart shows price making a lower top compared to DWV making a higher top. This represents a minor blowoff as prices fail to respond to higher volume. This goes contrary to the belief that volume leads price.

The next chart shows a minor blowoff to the downside in June. More recently we have price making a low beneath the prior low, but this is not confirmed by DWV (positive divergence). This implies that price will continue trending upward in the short term (days to weeks).

I think that DWV is only good for short-term comparisons because it has an upward bias over the longer term. Note above that the December price lows are higher than the August through October price lows, whereas the comparable DWV lows are equal. That could be interpreted as a positive divergence, but it could simply be a symptom of the upward bias. The long-term chart below clearly demonstrates the upward bias.

Bottom Line: Dollar-Weighted Volume is a unique indicator because it expresses volume in terms of dollars, and it can be a handy tool for identifying short-term price trend changes. Beside giving us positive and negative divergences, it can also alert us to times when blowoff conditions exist, cases when leading volume is actually signalling a trend reversal.

One of the ways we have of measuring sentiment is by tracking cash flow into and out of Rydex mutual funds through the use of our Rydex Cash Flow Ratio. The Ratio is calculated by dividing cumulative cash flow (CCFL) of Bear funds plus Money Market funds by the CCFL of Bull funds. We display the results on a reverse scale chart so that high Ratio readings coincide with price lows.

The chart below shows that at the October price lows the Ratio went lower than any time since the 1999 correction. Recent Ratio lows were more extreme than two previous bear market lows, and extremes like that are a sign that sentiment is getting very bearish. Unfortunately, the recent Ratio low exceeded the normal range of the last nine years, so we have to wonder if the limits of the range are expanding permanently.

The above chart displays our entire history of the Ratio, and obviously the range was much wider in the early days. The reason for this was that there were fewer assets in Rydex funds back then, which allowed for a more volatile Ratio.

The chart below shows the components of the Ratio calculation. Note that as the market was topping, Bull CCFL fell and Bear CCFL flattened. Then as the market crashed, Bull CCFL decreased, and Bear CCFL increased, as expected.

The really significant feature on the chart is the sharp increase in Money Market fund assets as people ran to safety. The next most interesting feature is that (see the thumbnail chart on the lower righ corner of the chart) all that recent inflow has moved out of the Money Market fund and, presumably, back into the Bull funds.

Bottom Line: The Ratio is well off its recent lows, but it is still reflecting very strong bearish sentiment, and this is confirmed by Investors Intelligence Advisor Sentiment and NAAIM Sentiment as well. This taken with other indicators we discussed earlier this week, we believe that the Ratio has signalled an important price low.

QUESTION: Carl, I have read a lot of articles recently indicating gold miner stocks should go up and outpace gold. So far nothing but a drop in goldminers. Would it be possible for you to show charts of GDX and GDXJ with your comments on one of your daily posts? Thank you for a great website.

ANSWER: Back in the day before precious metals ETFs, gold mining stocks were considered a convenient surrogate for exposure to precious metals. The XAU (Gold & Silver Mining Index) is composed of large-cap members of this group. First let's compare a long-term chart of the XAU with one of gold. Note that the XAU and gold ran pretty close together from 1984 until about 2000. Then from the lows of 2000 gold rallied about +1400% versus only +125% for the XAU. (The Price Relative line has been trending down since 1996.) An interesting point is that both indexes had major corrections in 2008 -- about -70% for the XAU and -25% for gold.

I think we can say that in the past there has been a passing similarity in price movement between the two indexes, but it has been a similarity in direction, not magnitude. Why the difference in performance? Well gold is a commodity, and gold stocks are, well, stocks in companies that mine gold. As stocks they carry all the baggage of the companies they represent, and they tend to be affected by the movement of the broad stock market as well.

As an aside, let me say that I have a strong dislike for gold mining stocks as trading/investing vehicles. They tend to trade in broad, volatile trading ranges, and they defy my attempts at trend following. This can be seen on the charts of the two ETFs you requested.

As for specific issues, GDX recently had a failed breakout attempt, a bull trap, and is about to challenge the bottom of the one-year trading range. GDXJ has executed a classic head and shouders pattern and has a minimum downside target of about 22.25.

Bottom Line: The price of gold is already 'baked into the cake' of gold mining stock prices. There could be some future management initiatives that may take better advantage of higher gold prices as regards the bottom line, but I wouldn't count on a major rise in gold stocks driven by a move to correct the lag in gold stocks versus the price of gold.

There are plenty of opinions available on stocks, sectors and markets. Take them all with a grain of salt, then look at the chart!

In the last month or so gold has formed a double top that could be the start of a much needed correction for the metal.

Specifically the chart below shows an Adam & Eve double top. The first top is sharp and spiky, and the second is more rounded, depicting a labored attempt to reach the previous highs.

A neckline is drawn across the July price low, showing the support level that needs to be penetrated in order for the formation to "execute" (trigger expectations of lower prices). If it does execute, the minimum downside target would be about 1600. This target is estimated by measuring the distance between the first top and the neckline, and then projecting the same distance from below the neckline. It is interesting to note that the less accelerated rising trend line drawn across the January and July lows is rising at a rate that could provide support around 1600 if the correction proceeds. A steep rising trend line has been penetrated, increasing our expectation of further decline.

Gold is in a bull market, so bearish formations are less likely to execute; however, the parabolic rise seen on the monthly bar chart below is strong evidence that a correction is necessary -- a vertical ascent is not sustainable.

A typical resolution for a parabolic ascent is a total collapse back down to the level of the basing pattern that preceded it, but, given the fundamentals supporting gold, I think other options are more likely. A healthy correction like the one in 2008 is an outcome that would satisfy the need to stunt the vertical advance. Another outcome would be a high-level consolidation, which is where prices move into a trading range, in this case say, between 1600 and 1900 over a period of years, but, again, I think the fundamentals argue against that.

Bottom Line: I wouldn't dare say that gold can't continue higher, but the recent vertical movement of gold cries out for a correction to digest the advance. The recent formation of a double top gives us hope that a correction is beginning.

Take care,
- Carl

P.S. Be sure to read the Site News section of this newsletter for a special coupon that you can use to get a FREE MONTH of DecisionPoint.com service!

It is a concept that we stress on a periodic basis, and we got another illustration this week. Technical indicators must be interpreted within the context of the overall market trend.

On August 17 the S&P 500 Index 50-EMA crossed down through the 200-EMA, declairing by our definition that the long-term trend was down and that we were in a bear market. When this happens, we remind ourselves that "bear market rules apply," and that we should expect negative outcomes more often than positive ones.

As of yesterday many of our short-term indicators were overbought and topping -- the chart below shows what the STO-B and STO-V looked like yesterday. And even though prices had broken above the previous August top, we expressed doubts about the viability of the rally in our daily blog because internals were negative.

While we just recently had technical confirmation that we are in a bear market, the bear has actually been around since the May 2 top, and the coincidence of price and indicator tops was an early clue that the up trend had stalled and may have been in trouble. Since the price break in August we need to consider overbought indicator tops as being cracks in thin ice.

- Carl

On 8/2/2011 our mechanical Thrust/Trend Model generated a medium-term NEUTRAL signal for the S&P 500 Index just in time to avoid the market break on 8/4. (Neutral means to be market neutral -- in cash or fully hedged.) After the breakdown we believed we had entered a bear market, but we had to wait for the long-term component of the Trend Model to generate a mechanical SELL signal to make it "official", which it did as of 8/17/2011.

A long-term sell signal is generated when the 50-EMA of a price index crosses down through the 200-EMA (generally known as the Death Cross). At Decision Point we don't consider the long-term sell signal to be a demand for action. Rather it is a flag that says, "Hey, folks, we're in a bear market now. Act accordingly."

Below is a daily bar chart of the S&P 500 with the recent crossover circled on the right. Just to show that it is not a perfect indicator, I have also annotated on the left two 50/200-EMA crossovers that occured in August and September of last year, both of which were bad signals.

Am I concerned that this latest signal will be wrong? Not really. Its value is primarily in that it tells us to adjust our expectations from bullish to bearish. In a bull market it is best to stay positive and expect bullish outcomes, even during corrections. In a bear market, if we expect negative resolutions, we will be right most of the time.

It is a long-term sell signal, but it doesn't mean to go 100% short on the day of the signal, rather we should look for short- and medium-term opportunities to go short to develop. This is where we have a margin of safety when working with these long-term signals -- we look for opportunities. If we don't find many, our exposure will be limited.

Reviewing major market indexes I see that we have long-term sell signals on The S&P 500, S&P 100, NYSE Composite, Russell 2000, Wilshire 5000, S&P 400, and S&P 600. We are still waiting for the Dow, Nasdaq, and Nasdaq 100 indexes, but their prices are well below their 50-EMA and 200-EMA, which means sell signals are virtually inevitable.

A recent CNBC article urges: "Don't Fear the 'Death Cross' in This Fast-Moving Market". In other words, keep right on thinking like a bull. That's just silly. We have objective evidence that the market has entered a bear phase, so we should take that evidence at face value until the evidence changes. The fact that we ahd two bad signals in 2010 is no reason to ignore the current signal because the model has a pretty good record over time. In 2010 Timer Digest ranked Decision Point #4 for Long-Term timing over a 10-year period, with a gain of +77.64% versus a loss of -4.74 for the S&P 500. (Past performance does not guarantee future results.)

Bottom Line: Long-term SELL signals abound on the major stock indexes, which means we are by our definition in a bear market. It is now time to pass our analysis through a bearish screen, to assume that most surprises will be to the downside, and to look for opportunities to sell short. This is a perfect example of technical analysis being a wind sock, and we have no choice but to plan our approach accordingly. If the wind changes, we will adjust.

READER COMMENT: I have written to you before regarding your comments on volume ("where is the volume?”) which imply that volume "confirms" a move.  To me, like many others, volume no longer means anything, or at least not what it used to mean.

 See the recent speech by Andrew Haldane at the International Economic Association Sixteenth World Congress, Beijing, China, 8 July 2011, courtesy of the  the Bank of England; the speech addresses trading volumes here and Europe in the last decade, with special reference to the Flash Crash.  

Q: Where is the volume?  A:  It is whatever the quant algorithm says it will be---at least until the algorithm changes.

The speech can be found at http://www.bankofengland.co.uk/publications/speeches/2011/index.htm.  It is the 08.07.11 speech, entitled The Race to Zero.

RESPONSE: First let me recommend that our readers read the referenced speech. It offers great insight into the Flash Crash, and offers the conclusion that there is still nothing that can stop another one. This is a conclusion to which I had come because of the absence of anything but speculation on the subject.

If I understand correctly, you assert that high-frequency trading (HFT) has changed the nature of volume and has rendered useless. In part I agree -- I don't think volume has the same strength of meaning as when we were all charting with a pencil on graph paper, and we were able to say with some certainty that expanding volume confirmed the price move. Now we have to say that this may or may not be the case.

Nowadays I don't necessarily look for volume to confirm daily moves, because volume doesn't play a primary role in my decision making, but overall I do expect a bull market to have a level of volume that reflects broad market participation. Specifically, I watch a number we call Percent of Average Daily Volume. This is the result of dividing the 250-EMA of daily volume (the average of about a year's volume) by today's volume.

Here is a chart of the 2003-2007 bull market. Note how consistently the volume bars exceed the 250-EMA of volume line. Also, volume steadily expanded from the bottom to the top.

Now, here is a chart of the 2009-2011 bull market. Note the frequency with which the volume bars failed to reach the 250-EMA line, and the persistent down slope of the volume bars over the last two-and-a-half years. This has been the source of my complaint about volume. It has reflected that something was wrong (at least radically different) internally.

The final chart makes your point regarding HFT. Note that the volume for this bull market has actually been much higher than that of the prior bull market. So while I have been asking, "Where's the volume?", it is because of daily evidence that volume has been contracting away from the 200-EMA. I failed to look at the bigger picture.

Bottom Line: The 2009-2011 bull market was a confusing creature based upon consistently weak volume relative to the 250-EMA of volume, and because of gradually fading volume as prices rose higher. Absolute volume is now much higher than in the past because of HFT, which can represent as much as 80% of daily volume; however, in my opinion, the downslope of volume is still an indication of fading participation and is useful input for our analysis.

While this bull market has rallied +105% from the 2009 low (basis the S&P 500), I have had a sense that there was something "squishy" about it. One thing was the absence of convincing volume, something analysts have been complaining about since the bull market began. Recently, when looking at our Blue Chip 152 Top 10 Index, I found some surprising evidence of just how dysfunctional this bull has been.

The Blue Chip 152 is a list of stocks that includes the stocks in the S&P 100, the Dow 65, and some Nasdaq favorites. Some years ago I got the idea to track the top 10 relative strength stocks, believing that this would provide a a short list of stocks that would always be upside winners. Boy was I wrong about that. Just look at the chart.

While the Top 10 have tended to perform better than the SPX in bull markets, they perform far worse during bear markets. The reason is simple. Market leaders tend to retain their leadership in bull markets -- once a stock rotates into the Top 10, it will stay there quite a while until it is forced out by a stronger stock, which in turn persists in its leadership position.

In bear markets the story is very different because the majority of stocks are are in decline. Stocks with high relative strength are just not declining as fast as other stocks. As a stock enters the Top 10, it is likely that it is peaking, rather than being in the middle of a strong up move, so the Top 10 stocks as a group are more likely to be moving into accelerated down moves.

Here are some charts of the Top 10 and the S&P 500 which allow us to compare bull market gains and bear market losses. Note that during the 2002-2007 bull market the SPX gained +105% versus +336% for the Top 10. Now compare that with with current bull market gains of +105% for the SPX (already equal to the last bull market) and +119% for the Top 10 (way behind its performance during the last bull market). While the Top 10 is ahead, it is really lagging its normal performance. The reason for this is that there is faster rotation in and out of the Top 10, which is caused by weaker than normal performance of the leaders.

Bottom Line: If your impression of this bull market has been that it doesn't "feel right", your impression is not without basis. The Blue Chip Top 10 Index shows us that the leadership has been weak and lacking in persistence compared to the previous bull market.

QUESTION: Carl, is it okay to use the Trend Model on bond fund NAV's to manage risk, or is it inappropriate because you can't factor in monthly payouts? I own PTSAX, Bill Gross' total return investor class bond fund, and it looks like the 20-EMA is ready to cross down through the 50-EMA. I don't want to sell it if I can help, but I will if I have to. Gross is probably the best out there but the fund has been seeing some noticeable weakness of late.

ANSWER:  Distributions occur with stocks and mutual funds, and it is important for investors to understand what they are and how they affect prices. When a company or mutual fund makes a distribution, they are transferring company/fund assets to shareholders, and prices need to be adjusted to reflect the fact that the company/fund no longer owns those assets. (Note: A dividend is a distribution.)

The distribution where this is most obvious is a stock split. In a 2 for 1 split the company distributes additional shares to shareholders so that they will own twice as many shares after the split. On the day of the split (the ex-distribution date) the price of the stock is halved, and historical prices are divided by two. If historical prices were not adjusted, the chart would be useless because on the day of the split it would show a 50% decline. Click here to learn more.

Our Trend Model is driven by exponential moving average (EMA) crossover, so it is important that the historical data of a given mutual fund is adjusted for distributions. As with most bond mutual funds, PTSAX makes small monthly distributions and PTSAX historical data are adjusted each time by StockCharts.com, whose data we use.

As for applying the Trend Model to a particular price index, we would want to select a low volatility index. PTSAX certainly fills the bill in that regard. It "tends to trend" rather than jump all over the place. In the case of a mutual fund we cannot sell it short, so we are only concerned with 20-EMA and 50-EMA crossovers. When the 20-EMA crosses up through the 50-EMA, it is a buy signal. When the 20-EMA crosses down through the 50-EMA, it s a signal to exit the position.

These rules do not work perfectly, but they are designed to keep us invested when the trend is favorable, and to eliminate exposure when prices have exhibited sufficient weakness to cause concern.

Bottom Line: Historical prices must be adjusted for distributions or they will be useless for purposes of technical analysis. This is not a recommendation for you to take any specific action, but I believe that our Trend Model is suitable for use with PTSAX, and that it will help you sleep at night knowing that buy and sell decisions are guided by an objective timing tool.

While the U.S. Dollar Index didn't do so well Friday, it is getting ready to generate a Trend Model buy signal. Note on the chart below that the 20-EMA is less than a hair away from crossing up through the 50-EMA, which will mechanically generate the buy signal. Note also that the Index broke above the top of a descending wedge formation. Friday's decline, so far, was the expected snapback to the line, which is now support. Unless there is more followthrough to the downside, I'd have to say this chart is bullish.

Now let's look at the chart of the Dollar Index Bullish ETF (UUP), which is supposed to track the Dollar Index. Note that the price barely penetrated the overhead resistance on an intraday basis, and failed to close above it. More interesting is that the price relative line has a gradual downward slope and a steep drop in the last three weeks. This means that UUP is normally weaker than the Dollar Index, and it has been exceptionally weak more recently.

So what should we believe, the Index or the ETF? The ETF trades on supply and demand like a stock. The Dollar Index simply tracks the U.S. Dollar's strength against a basket of currencies. If I'm going to try to forecast the future path of the dollar, I'll use the Dollar Index chart. If I'm trading the ETF, I'll use the UUP chart.

Is UUP giving us advance warning that things are about to go south for the dollar? Possibly, but for now I'll believe the Dollar Index, because UUP has historically underperformed the Index. If the Index continues higher, UUP is certain to follow.

For more clarification, let's look at the Dollar Index weekly chart. The price breakout looks pretty solid, and the PMO has crossed up through it EMA. We should have positive expectations unless this picture changes.

Bottom Line: The Dollar Index has been performing well for about six weeks, and technically we expect it to continue for a while. UUP doesn't look as promising, even though it is supposed to track the Dollar Index, so we would take our trading clues from the UUP chart. I think this conflict could be resolved as early as next week.

For over three months the market has been chopping around and making very little progress. In the process internals have been weakening, a fact that is reflected in the signal table below. In our Decision Point Alert Daily Report we track mechanical timing signals on 27 market and sector indexes. In addition to the broad market indexes, we track the nine SPDR sectors and their equal weighted counterparts, which normally perform differently than the cap-weighted indexes.

Of those 18 sector indexes 10 have switched from buy signals to neutral over the last few months. Four had signal changes today. The technology buy signals that just closed were only 5.5 weeks old and were the result of whipsaw that typically occurs during the topping process.

Let's remember that the sector SPDRs are actually formed by breaking the S&P 500 stocks into nine sector groups. While the S&P 500 is on a buy signal, we can see that it is being supported by only four of the nine sectors -- Consumer Discretionary, Consumer Staples, Health Care, and Utilities. Let's look at those charts, remembering that their current buy signals will be closed when the 20-EMA crosses down through the 50-EMA.

Consumer Discretionary is looking a bit shaky, but the rest of the charts show good separation between the 20/50-EMAs.

Bottom Line: We are seeing a gradual breakdown by sector within the S&P 500. While most of the remaining buy signals will have some durability, there are fewer sectors supporting the index than there are pulling it down.

A reader recently called me a perma-bull, which is amusing, since by nature I'm usually disposed toward bearishness. I will, however, remain bullish until our mechanical timing model switches from a buy. The model will be bullish until the 20-EMA for the S&P 500 crosses down through the 50-EMA. We can see on the chart below that those moving averages are converging, but there is plenty of room before a crossover will take place.

While the model provides discipline, we are still permitted to look at indicator charts and speculate about the future. For example, on the chart above we can see a rising wedge pattern, which is a bearish pattern that usually resolves to the downside. There is still room and time for prices to bounce around inside the wedge, and the rising trend line is still holding, so this is not strongly conclusive.

Below is a Percent Buy Index (PBI) chart for the broad market. It shows the percentage of buy signals for the 100 Dow Jones market sectors. While it is still at a relatively high reading, there is a negative divergence between the PBI and the price index. This shows that the price advance is being undermined because fewer sectors are participating.

The next chart is the weekly bar chart of the S&P 500 Index. The concern here is that the weekly PMO has topped and is falling below its EMA (green line). There is also a negative divergence between the two PMO tops and the price tops. This is really bearish.

Bottom Line: The S&P 500 has not yet given the fatal sign of breaking down through the rising trend line drawn from the August 2010 low, but there are internal indicators that are giving strong evidence that an important top may have been made on May 2. That is to say that we could have begun a substantial correction, or the bull market may be over.

On Monday, May 9, Citigroup (C) stock will undergo a 10-for-1 reverse split. What this means is that 10 shares of C will be merged into one share, and holders of C will own one-tenth as many shares, but each share will be worth ten times the value of pre-split shares. Most people understand the concept, but many do not realize that a reverse split is essentially a negative event.

It is a rule-of-thumb that the average bull/bear cycle lasts about four years trough to trough -- 2.5 years of bull market followed by 1.5 years of bear market. Like most of these kinds of rules, it is good to keep them in mind, but don't try to set your watch by them. For example, the last bull market lasted five years, and the bear market that preceded it lasted two years. As it so happens, the last bear market lasted almost 18 months, which makes it fit the template almost exactly.

That doesn't mean the current bull market will also come in on the average, but we must take note that it is now two years and two months old, and is becoming vulnerable to the law of averages.

The market is also becoming vulnerable to the next six-month period of unfavorable seasonality, which begins at the end of this month.

Bottom Line: The current bull market is getting a bit long of tooth, and the specter of six months of negative seasonality lies just ahead. This is not a happy coincidence, especially combined with the fact that volume has been weak for many months. Our mechanical timing model has us on a buy signal for now, but I would take it quite seriously if that were to change.

Looking at global markets we can see that "V" bottoms abound, and that in some cases the February highs have already been exceeded.

There could be some doubt that the rally can be sustained, and that, perhaps, a double top will form and that there will indeed be a retest, but I seriously doubt that will happen. Recently I conquered my tunnel vision with the S&P 500 Index and looked at global markets. What I discovered was that quite a few do not have "V" bottoms at all. Rather there is a large number of double bottoms (a solid technical bottom formation), which demonstrate broad-based strength in world markets. The graphic below is a bit daubting, but you only need to scan it briefly to see my point.

Bottom Line: Despite the precarious nature of "V" bottoms, the broader picture reveals a preponderance of solid double bottoms, which leads me to believe that the "V" bottoms will lead to higher prices without the benefit of retests.