Technical Rally Underway

Have you heard that phrase before? What does "technical rally" mean anyway? In this case, it means that the rally is occurring on below average volume and less than desireable breadth while price level buy signals have triggered. Even Friday's large rally was accompanied by 56 NYSE New Lows and NYSE New Lows has only been below 40 3 times since this rally began on July 15. You may remember that the Cabot's Two Second Indicator looks for New Lows to be below 40 for healthy rallies. Volume was also well below average on Friday and less than the volume on Thursday's selloff.

This doesn't mean that traders can't profit from the rally, but rather that one should have a clear understanding that unless a significant volume shows up by the end of August that the markets will likely retest and move below the July lows. Traders should be ready to exit positions on any sign that the rally is losing strength and expect whipsaws like Thursday and Friday to continue to be the norm.

So what clues can we look for to let us know that the rally is ending?

1. McClellan Summation Index turns down.
2. % stocks above 40ma exceeds 60 and turns down.
3. Absolute Breadth reaches an extreme level - below 20 or greater than 55.
4. VIX & QQV breakout above the upper trendline.
5. Consecutive weekly closes in the lower half of the weekly range.
6. Failure to follow-through at key moving averages - 50dema and 200dema.
7. Negative divergences in the RSI and MACD.
8. Distribution Days increase to 5 or more.
9. Leading Stocks of the rally fail.
10. The financials start breaking down.

Keep a list of these types of indicators and look of the multiple confirmation that the rally is ending.