Despite the V-shaped straight-up lower volume rip higher by the overall market the past week, our market models remain under a NEUTRAL condition across the board. This includes the Nasdaq and Nasdaq 100 which retook their downtrending 50 day moving averages. This straight up rally from extremely oversold and overfearful levels while strong is far from convincing. Therefore, even if the market continues higher, while we will take our long signals as they are generated, our model will not switch to a BUY mode until we can see how the market digest the recent gains. There must be a period of consolidation and a further breakout, before our model fires a BUY signal.

Why? There are a lot of reasons. First and foremost, we are not chasers. We do not chase momentum. This is a methodology of an experienced speculator. It is not how we trade. Second, since the actual Follow-Through Day there has been zero concrete accumulation in either the NYSE and the Nasdaq. Third, this is the most unhealthy V-shaped move off the lows we have seen since 2008. The 4-week ATR of the NYSE and Nasdaq is the most volatile since 2008. While it could be indicative of a potential bottom, as you will remember if you were around, we did not bottom and rally in a straight up V-shaped manner. We needed a lot of backing and filling which eventually led to the decline into the 2009 lows.

Another problem we have with going all-in on this rally attempt by the general market is that while sentiment did get pretty fearful on the short-term longer-term there wasn’t enough fear to say that everyone that was a bull has given up. In fact, I would say the opposite has happened based on my observation of Facebook and Twitter post. I do not know anyone who is a “hardcore bear” here. Once again, all I see is the BTFD crowd becoming louder and more arrogant as each passing day goes by. I remember the 2002/2003 bottoming process. I remember the 2008/2009 bottoming process. You can be 100% sure, we do not have that kind of sentiment.

Did the put/call hit 1.5? Yes. Did the VIX hit 30? Yes. Did the put/call hit 2? No. Did the VIX hit 80 like it did in 2008? No. Did the bulls come in on the II survey down to 35%? Yes. Did the bears move off their lows around the 20 level? No. Real meaningful bottoms come when there are more bears in this survey than bulls. We obviously aren’t there yet. When these fear gauges hit levels seen at more significant market bottoms and then we get a rally like we are having now with volume much higher than the previous down leg, then I’ll get more bullish. Until then, I just am not buying it.

Our biggest issue, for now (remember, a consolidation could lead to potential solid technical patterns that would become actionable), is the action in individual stocks. Especially leading stocks. If you are not familiar with the Megaphone chart pattern, I suggest you start brushing up on it. They’re everywhere. From tech stocks to transportation stocks to big-cap stocks I have more megaphone consolidation patterns than legitimate double bottom patterns and/or cup with handle patterns. If this current move off the lows was occurring within a normal historical context we would be seeing more proper consolidation and not these V-shaped rips that lead to new lows that then lead to new highs all in a span of weeks to months. This isn’t healthy for a sustained uptrend.

So where do we currently stand on the market. First off, clearly we are in the NEUTRAL camp here leaving an open mind to the possibility that this rally can firm up a bit and then attempt an attack at the old highs going into the year end. We also see the possibility for this rally attempt to have gone on just long enough to suck in the greedy momentum chasers that it now reverses in glorious fashion. Either way, we have a game plan ready for either outcome. When a market is this volatile from week to week at levels not seen since 2008 and as ZeroHedge/NANEX has reported is the most illiquid underneath the market bid/ask than ever, you can be sure it is not going to be a smooth ride more-than-likely one way or the other.

This is why we will continue to exploit daytrading opportunities on the long side in the general market when the indexes are oversold on our momentum oscillators and why we will focus on the short-side of the general market intraday once our short-term momentum oscillators being to roll over. On top of that, there continues to be opportunities available in small-caps following earnings. Then you had the recent ebola plays that offered a lot of action intraday. Then you have classic pump-and-dump operations like VOIL that are still hanging around. While this market is volatile, there are going to be opportunities on an intraday basis.

As for overnight EOD Trend Following signals. Those are going to remain very risky, obviously, when you have such extreme moves in the market. This is why we will continue to operate with “fun-sized” positions rather than our usual 5%-20% position size per trade. Along with the fun-sized position size, when we do put on an overnight position, we will immediately place hard on-the-books Sell Stop orders to prevent from any possible insane intraday flash-crash which we are seeing in too many names. If there were less blowups, hard Stops would not be needed. For now, they do. Despite what every trader that has been trading less than 6 years tells you, this is the most dangerous rally attempt yet since 2008 to chase. Patience will pay off for the professional market operator.

We are heading into the most bullish time of the year seasonally for stocks. It would be nice to consolidate these gains for a week or more on lower volume and then rip higher. Something tells me, that isn’t going to happen. Whatever does happen, based on previous market patterns, will probably leave us all shaking our heads in a bit of disbelief once again. Fun times. Let the insanity continue. I wish you the best and have a great upcoming profitable week. Thank you. Aloha.

Top Current Holdings – Percent Gain – Date of Signal

VIPS long – 496% – 7/17/13
OVAS long – 78% – 8/8/14
AGIO long – 60% – 9/24/14
RENT long – 36% – 9/24/14
VDSI long – 35% – 8/4/14