Monday, May 11, 2009 After Market Close

Short-term, are we heading into a bear trap or was Monday's decline the beginning of a market correction? The decline was strong, but it was not a significant distribution day.

The SPX weekly stochastics are on a buy, but topping. The daily has topped, has crossed and is in the 90s heading down, but it needs to break below 80 for a true sell signal. The 60-min is on a sell with the 30 and 15-min on a sell, but bottoming. Stochastics seems to be suggesting a decline early on Tuesday with a rally later in the day.

The 10-day moving average for the VIX is bullish and has been heading down uninterrupted for a couple weeks now. The McClellan Oscillator (NYMO) has been gradually falling from about 100 in early Arpil to 17.43 at the close on Monday. It needs to go negative for a sell.

Ths market is heavily manipuated, but Tueday's action should provide some guidance. If we have a decent down day, the NYMO might go negative, the VIX might turn bearish, and daily stochastics should break below 80. My hunch is it will go down on Tuesday.

The stocks played by the program traders are the DIA for the Dow, SPY for the SPX, and QQQQ for the NDX (here), and all are heavily bearish. We are going into options expiriation this Friday so the program players will be looking to squeeze the shorts going into expiration. With the embassies this bearish, the bulls will look to make some money with their put/call leverage, but it will take a big move up to panic the bears into selling. The bears should put up a good fight for the rest of the week.

And don't forget to keep a close watch on is the US dollar. The USDX has fallen to about 82.6 on the FOREX as the Fed continues monetization. The world stock markets could be collapsed to support the dollar to chase money back into US treasuries, which are also breaking down. The PPT will pick the time and dollar price to collapse the markets, which I think will be around 80.

If the market does continue to rise into options expiration on Friday and the US dollar continues to fall, expect a big stock market pullback to begin next week.