The first leg up of the July/August rally is over and a pullback has begun after markets hit resistance at the downsloping trendline of the April to July correction. The pullback will probably not be too severe. After it is over, it will probably appear as more of a flag or sideways consolidation. However, the pullback may last well into next week. This is the time to wait patiently for setups to develop while not exiting existing positions prematurely. The Qs may fall as low as 43.50 to 44.00 before they find a footing. On a positive contrarian note, the % Bears exceeded the % Bulls in the Investors Intelligence weekly sentiment index for the first time since early 2009.
I will be looking to go long on the MACD buy signal during this pullback as long as the MACD remains above its signal line. I will remain long on the IBD follow-through as long as IBD does not call a correction. I will be looking to add on a move above the July high in August should it occur, as July is the low month of the correction. I will also be looking to add on a breadth thrust as indicated by the Nasdaq 100 Bullish Percent Index, $BPNDX, moving above it 34dema. At that point I would be fully allocated to index long positions.
I will be looking to exit index longs on an approach to the April or May highs depending on the form of the rally in anticipation of another selloff this fall to complete the entire correction. I will be looking for clues of exhaustion, such as momentum divergences and breadth divergences, which should be prevalent if this is fact a B or X wave.
I know don't about how others are feeling at the moment, but for me it seems as though I am in a holding pattern. It seems clear to me that markets will move higher after this correction is complete, and yet it also seems clear that it may be 3 to 5 months before it is. Trading the swings in this correction has been difficult, though certainly a good opportunity to hone one's skills, but I am ready for the next major leg up to truly get going.