The Cracks Beneath the Surface…

Back in October, I posted an article here on Reddit titled “Are We on a Ticking Time Bomb?” predicting where the exact top in the market would land. At the time, the market was flying, and everyone and their cousin was buying. A lot of people liked my post, but many discounted what I was seeing.

However, the market rolled over right where I said it would.

Then, on January 27^th I came back to Reddit and made another post titled “"Conditions May Be Shifting…,” claiming that the market was going to roll over again and that it would not break the previous high. I warned investors not to fall for the rally.

The next day marked the topped and massive selling followed.

So here we are again. Third time. I'm trying to go three for three, and honestly, I think the setup is even cleaner this time around than the last two.

April was a monster month, no doubt about it. Everything was trading higher. People switched from fear to greed in just a couple of weeks. But underneath the surface, is everything still good?

Let’s get into it…

Market Sectors

This is one of those things nobody wants to look at because it's boring, so I get it. But I like to always track consumer discretionary against consumer staples, you're basically asking one question: are people spending money because they want to, or because they have to?

Take look…

https://ibb.co/qMB6WZ9R

Staples (XLP) are starting to win out over discretionary (XLY). This is a classic warning sign. That means investors, the smart money types especially, are moving into defensive names.

And it's not just the consumer. Transports are not keeping up with industrials, meaning products are getting manufactured, but shipping is starting to slow down.

Volume

So obviously, the market has been grinding higher over the last month, but on what?

Take a look at QQQ…

https://ibb.co/k2DNbKDL

For such a massive rally, it's odd that the volume has been noticeably lighter than what we would expect to see on this type of move. When the market rallies on light volume, that's not conviction. That just means the sellers have not entered the market yet. But once they do, things will change, and often quickly.

Back in December we had a similar setup, lighter volume on the way up, and then boom, the rug got pulled. This time it's been going on for even longer, which means once the sellers step back into the market (and they most certainly will at some point), this thing is going to collapse quickly.

Put /Call Ratio

The Put/Call Ratio is an oldie but goodie. When you see the equity put/call drop below 0.55 you know people have gotten way too comfortable. They're loading up on calls. Everybody just wants to pile into the good times. Unfortunately, the market likes to hurt the most amount of people whenever it can.

Currently, the put-call ratio is sitting at 0.46. That's deep into complacency territory. Call holders, the market's coming for you!

When a lot of people are wrong and must get out of that position, that’s what causes big moves. When most people are right, things just plod along.

Market Breadth

When the market accelerates forward, one thing we should always do is look under the hood to make sure that it's actually as healthy as it appears to be. The advance-decline line does this by looking at the difference between the number of stocks advancing versus declining.

When the A/D line is rising, that means the majority of stocks are taking part in the move. When it's declining, that means the majority of stocks are falling.

Take a look at it today…

https://ibb.co/Y43Pdm58

You can see with the thick red lines that the advance-decline line has been falling over the last two weeks despite the indexes rising. This means the rally is being carried out by a small group of mega-cap names, while the rest of the market is starting to struggle. The market moving higher creates the illusion that everything is fine, but the foundation is cracking. It's not a matter of if, it's a matter of when. And when it finally happens, it tends to be fast and ugly, especially if there's no volume to support it.

Elliott Wave

Alright here's where it gets a bit more technical. Check out the Elliott Wave on QQQ…

https://ibb.co/9krX9TdP

This chart appears to be a 5-wave impulse move to the upside that's just about run the course. Maybe we get one more tiny push, could happen early this week, hard to say exactly. But the structure looks done or very close to done.

If you measure wave 1 distance and overlaid it onto wave 5,they generally line up fairly closely and that is what we have here. Textbook stuff. On top of that, both RSI and rate of change are showing bearish divergence. Price making higher highs while the oscillators make lower highs. Classic warning sign that momentum is fading.

Gann Time Factor

Finally, there's the Gann Time Factor, which (okay, I know a lot of people consider voodoo technical analysis, but that's fine) seems to generally work. I'm not going to sit here and explain the entire methodology. But the next window of natural dates falls between May 3rd and 7th.

Gann cycles don't tell you the direction the market will turn, just that something significant tends to happen around these dates. Given that we've been rallying hard for a month straight, the inflection point is almost certainly down.

Of course, anything is possible, there are no certainties in trading, but when you have many confluence indicators all pointing to the same thing, it pays to pay attention.

There's a lot more I could dig into here, like the oil situation with Iran and the vanishing point, or liquidity drying up, but I'm not trying to go on and on. You get the idea.

I don't care what you do; I just thought I would share what I see.