A divergence is popping up on the charts that was the same as the one seen back in late January. 

Of course that divergence ultimatley led to the massive -10% correction off of the all-time highs. 

I follow the T2108 indicator provided by Worden, daily. It provides a reading on the percentage of stocks trading above their 40-day moving average. I have used it for over ten years now, and it is by far the best indicator for spotting potential tops, and identifying the bottoms in markets. 

I saw the divergence happening in January and I didn’t pay much attention to it then, but now, it is doing the same thing again, but even more so. And that is, as the S&P 500 continues to climb higher, overall, the percentage of stocks trading above their 40-day moving average is actually dropping. That really isn’t a good sign. 

As a result, I am being careful with how much long exposure I take on right now and waiting for index price action to confirm the divergence in the T2108 indicator, of a short-term top in this market to get short, or for stocks to trade in conjuction with the SPX better, in order to justify more long exposure. 

So take a look at the indicator as it was in January, when the market was trading at their all-time highs and see the divergence:

spy t2108 bearish divergence 2

Now notice the divergence, and how much bigger it is currently:

spy t2108 bearish divergence 1

Now, should you get heavily short? NO! The market can remain irrational like this, far longer than you’d expect. As a result it is better to wait for the market to start the turn lower first, before you get net-short on this market.

That is what I will be doing. 

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