Mish's Daily for 8/19/12

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I For the next two weeks I'll be filling in for Mish as she takes a much deserved break. So let me get one thing out in the open before you start hearing from me every day.

I don't hate this market rally.

I'm tired of hearing and reading that this is the "most hated rally ever". It's just not true. If this market was truly hated there would be more bearishness! Where are all the bears?

The truth is that this rally is one of the most envied rallies we've seen in a long time. And typical of human nature, jealousy is rarely admitted, and usually results in the pursuit of the object of envy.

So if you're wondering when this rally will truly end, don't expect to find it by relying on patterns based on low volume and rising prices. Of course there isn't any volume - there aren't any sellers! The market is full of jealous bulls afraid of the fact that the 2007 highs are now clearly in sight, or handily exceeded depending on the index you follow.

This bull market will end when all this envy ends. This will happen when too many traders and investors get what their jealous hearts desire - joyfully bullish!

That said. The SPY, QQQ, and DIA are all at the top!

The top I'm referring to is the one created earlier this year. It's unclear how long it will take for this important milestone to be truly tested, but patterns as significant as this top will not go unnoticed by the current market action.

As we approach this significant top during a seasonally light trading volume period, the bears are hiding, and the bulls are afraid to admit their market bias. However, based on the history of the VIX as a judge of how traders are feeling, the fact that the VIX at a 5-year low and getting close to one of our short-term warning levels is formidable warning that the few bulls this market has pushing it higher are a little too complacent. Additionally, the markets have moved far enough above their 10 and 20-day moving averages for me to raise a red flag indicating "too much - too fast".

What does all this mean?

An extended and complacent market will correct when there is a day that closes below the low of the prior day. Until then, don't hate this market, don't let jealousy get the best of you, and enjoy trading it from the long side with discipline.

I'll welcome the correction when it comes, and rue the day when too many jealous investors admit they were wrong. I suspect the correction will come first. It may be soon, but we have plenty of ways to see it coming (like the lower close I just shared with you), so let's not jump to any premature conclusions and allow the market to tip its hand.

Monday's have been weak in recent weeks so don't be surprised to see weakness and even a down day.

S&P 500 (SPY) 142.21 was the 2012 high. Friday it was broken, but there wasn't much fanfare - perhaps because the cash index for the S&P 500 didn't quite make it to its new 2012 highs. It was also a very narrow range day - only about half the range of a normal day. The Friday low is important, but S2 is also likely to be important support around 141.70.

Russell 2000 (IWM) Its key swing high was taken out by 2 cents (81.84), but could not close over it. After 3 market leading days, it's hard to expect anything more than a quality rest day. If this high is broken the key resistance levels are 82.50 and 83.00. If Friday's low is broken, look for support around 80.70.

Dow (DIA) 133.14 the 2012 high. Had an inside day with the low right at expected support at 132.16. Watch out for Thursday's high of 132.75. Key support areas are 132.00 and 131.30.

NASDAQ 100 (QQQ) A weekly close at the highest level November of 2000!

But don't get too giddy. 68.55 it the intraday 2012 high, and it didn't break it. This is likely to influence the market. If it breaks this high the bulls need to hold the market over it. A reversal after taking out this high would have traders looking to sell the "top". I look at a 3-period RSI, and with the last 2 days closing with an RSI reading at or over 99. I don't expect much upside here Monday.