A bear trap in place? There's a good chance

Look, I know the market is very overbought and it would be piggish to press longs here, but I gotta tell you, be very careful here on the short side if you intend to hold for more than a day or 2 because I think a painful bear trap is being set up here just like with the failed H&S. A lot of people are taking about the 2 "doji" candles that are showing up in the charts. These candles take place when there is a reversal in the intraday trend, in this case a downside reversal.

These dojis are giving trader types the confirmation that the upside may have finally exhausted itself and therefore are going to play the short side. I've even noticed some bullish traders turn bear now too! On the downside last fall we saw the same thing happen in reverse...bears turned bull around SPX 1100-1000 but yet the market still dropped another 25% before making a ST bottom in October.

I've talked about the rydex ratio as a timing indicator. It has worked very well in spotting bottoms in particular. The rydex ratio is the ratio of exposure rydex traders have in bull funds + sector funds vs. bear funds + money market funds.

One of the best components of this ratio to watch is the level of money market funds because it doesn't get distorted by changes in NAV. Big spikes and drops In MM funds coincide with ST or IT bottoms and tops respectivily. Typically and naturally, the level in money market funds should drop as the market rises indicating a decline in fear but look at what's going with MM funds.




MM fund levels have actually spiked instead of dropped like they should be doing and are approaching record levels! This is very bullish from a contrarian pespective because its showing huge skepticsm/fear in the face of a rising market i.e. wall of worry behavior. Notice MM fund levels are almost as high as they were at the March lows!

With current levels of MM funds it suggests at the very least downside will be quite limited and at face value suggests another big upleg in the market is going to happen again in the not too distant future. I know this is only 1 indicator but it has been a very damn good one. The only way I see this working out in the bears favor is if on a dip we see MM funds collapse. That could happen but it's not likely.

Bottom line: The odds of another bear trap being set are high. We saw the market stop at the predictable level of 1000 and it appears as if the trading community continues to fight this rally tooth and nail. I know it's piggish to press longs here after such a run up but to go short for more than a day or 2 is out of the question for me given what I've just discussed. If the market dips to fill the gap and can hold 970ish the bulls could very well be setting up for another charge higher...it probably won't happen instantly though....a little bit of base building will probably take place.