As recently discussed, the intermediate-term trend, as defined by the 20/50-day EMA pair, triggered a sell signal last Tuesday and that signal remains solidly intact at this time. The same 20/50-day EMA pair has also done an excellent job of defining the intermediate-term trend (bullish or bearish) on other major US indices as well, such as the Nasdaq Composite (see chart below) & Nasdaq 100. The Nasdaq Composite ($COMPQ) triggered a death cross of the 20/50 EMA pair on Thursday with the Nasdaq 100 following suit with a 20/50 day EMA death cross on Monday of this week.

The fact that the intermediate-term sell signals triggered in conjunction with the breakdown below the primary bull market uptrend lines in many of the major US indices means that there is a strong likelihood that we are looking at more than a typical run-of-the-mill correction like we’ve seen over the last couple of years. More active traders might consider adopting a short-bias with a “sell-the-rips, cover-the-dips” strategy (opposite of the buy-the-dips strategy in an uptrend). Longer-term swing & trend traders as well as investors might consider keeping things light for now as we still have the longer-term trend indicators (weekly & monthly trends below) solidly entrenched on buy signals at this time.

The earliest reliable trend indicator that I follow in order to determine the primary trend (i.e.- bull or bear market) is the 43/17-week EMA pair. Logically, this pair will trigger earlier buy & sell signal than the extremely reliable 10/6-monthly EMA pair but as with using any moving average pair for identifying trends, the faster (lower periods) the averages, the more prone they are to whipsaws (false signals). For example, as you can see in the $SPX quad-trend chart below, the 43/17-week EMA triggered only one sell signal since confirming a new cyclical bull market on the week ending Sept 4th, 2009. That sell signal came the week ending Sept 2nd, 2011, towards the tail end of the very sharp correction in the $SPX around the 3rd quarter of 2011. That was the largest correction during the entire bull market and it was technically a bear market in the Nasdaq Composite (defined by a drop of over 20%). However, the 43/17-week pair remained on a buy signal in the Nasdaq 100 during that correction & in fact, has never triggered a bearish cross-over since signaling a new bull market at the close of the week ending July 24th, 2009.

Remember: The trend is your friend and depending on what type of trader or investor you are, you might engage (or disengage) this market differently. For example, if you are investing for your retirement in 20 years, and you believe this to just be another correction in an ever-lasting Fed induced bull market, then your strategy might be to sit tight on your positions and maybe even adding on any weakness in the upcoming weeks/months (until/unless the weekly & monthly trend indicators roll over). More active traders might consider selling the rips (i.e.- shorting bounces back to resistance) and buying the dips (i.e.- covering or reducing short exposure when the prices fall to decent support & the charts indicate a bounce is likely). Typical swing traders might just position short & stay short until some decent evidence of a likely near-term & intermediate-term trend reversal starts to develop in the charts. Overall my bias remains short equities, long select commodities with a cautiously bullish bias on precious metals & the miners. However, just remember that nearly everything gets sold during panic sell-offs and this market has been a bubble in the making for years now make sure to adjust you position size on any longs commensurate with your risk tolerance.