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Suspicious declines after OEX Bullish % reversal

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Hmmmm.... one has to wonder about this morning's reversal lower in equities on the heels of a European rate cut and better than expected news from the weekly jobless claims. It's almost as if the market said, "I don't care, but risk may be to high for equities."

Currently, the Dow Industrials (INDU) is down 117 points at 8,620, S&P 500 (SPX.X) is off 11 at 906, S&P 100 (OEX.X) is lower by 5.8 points at 462 and the NASDAQ-100 (NDX.X) is off 14 points at 1,054. Equity BULLS will now begin taking any bullish trades with the thought of very short-term rallies in mind.

Don't think that EVERY stock will begin to decline. Stocks that should be AVOIDED if at all possible are stocks that trade in upward trends, have bullish vertical counts that are still in play and have not yet generated any type of supply/demand sell signal. I have seen more traders sit short in strong stocks in a declining market and tie up capital without any benefit of a broader market decline, by shorting strong stocks that are in FAVOR with the MARKET. A trader that is bound and determined to try and put/short strong stocks, should only appease that urge with smaller amounts of capital until the stock begins to confirm prior beliefs.

As noted in last night's market monitor at OptionInvestor.com and in last night's Index Trader wrap, yesterday's action had enough sell signals being generated in the S&P 100 components to have its Bullish % chart ($BPOEX) from www.stockcharts.com reversing into "bear alert" status and most likely has institutions implementing some hedge strategies in stocks at more overbought levels.

It's "normal" to see the narrower OEX, NDX and Dow Industrial bullish % charts create the first reversals from more oversold and overbought levels. I view the OEX and NDX bullish % charts as more "important" that the Dow bullish %, only because the Dow is so narrow (30 stocks) that it only takes two stocks to have its bullish % reversing the needed 3-boxes, or 6%, thus not necessarily all that indicative of potential index moves based on the internal strength/weakness of the indicator.

The reversal in the OEX bullish % now has traders attention, as a more defensive posture for the markets comes into play and traders begin scouring the charts, ideally looking for stocks that trade BELOW trend, have a SELL SIGNAL associated with their charts, and RELATIVE strength showing a "sell signal" on its point and figure relative strength chart. Bar chartists may use trends and RSI indicators to identify bearish trading opportunities.

Procter & Gamble (PG) - $1 box

Procter & Gamble (PG) $86.01 -0.04% has ranked "high" on my list of bearish candidates ever since the stock broke a triple-bottom with a trade at $87. At that time, the stock was trading above trend, but was one of the few stocks in the Dow that was generating a sell signal when the bullish % was rising as more and more components were seeing demand build and buy signals were being generated. PG has performed very well for bears in the more bullish market environment, another reversal back toward overhead supply, with the market internals now starting to show weakness makes for what I feel an excellent short/put opportunity. As such, recommending full positions for those that legged in with a bearish trade at $87 back in October in the previously profiled January $90 puts. Current target remains the bearish vertical count of $77, with stop at $90.

With the OEX Bullish % reversing into "bear alert" status, we can only now begin assess Professor Davis' probabilities study as it relates to the triple-bottom sell signal. According to Professor Davis' study, that point and figure pattern is profitable for bearish traders 87.9% of the time, for an average gain of 28.7% in 6.8 months. From $87, a 28.7% decline would be to $62.03. With risk to stop at $90, traders/investors can begin building risk/reward profiled with $4 risk (from $86) and reward targets of $77 and $63. I've also drawn a downward "bearish support" trend that may eventually serve as downward support should PG continue its recent declines.

I've also extended the recently broken bullish support trend (blue +) as often times, "old support broken becomes resistance." Extension of that trend is currently in play.

Jeff Bailey

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