It has been a while since I have posted as I am helping a good friend write a book describing his trading methodology.  I felt compelled to pick up the pace of my posts here on the blog because it finally looks as if irrefutable cracks are showing in this seven month old rally.

Those of you who have been following my posts know that I have been reluctantly going along with the trend even though there is no concrete evidence of economic growth other than the fact that governments world wide have had the currency printing presses going 24/7.  All anyone has to do is look at our nation's 17% unemployment rate as evidence that the consumer will not be able to hoist the economy on his or her back as in decades past.  That leaves more government chicanery and spending initiatives to stimulate growth, which is always temporary and leaves us worse off than if they had done nothing.

The financials have been the darlings of this rally, especially the large banks.  Regardless of what they or the government say, they have an endless supply of taxpayer dollars at their disposal along with their ability to move the market with their trading divisions (JP Morgan and Goldman Sachs especially).    When the odds are so tilted in the bank's favor, they should be rocketing to the moon, unless there is trouble ahead. 

In the chart below, I am taking a technical look at JP Morgan which has rallied 217% off of its March low.  I have also plotted three volume based indicators.  The top indicator is a 21 day normalized version of intraday intensity (an indicator developed to track institutional block trading), the middle indicator is standard 14 period money flow, and the bottom indicator is an 8 day volume rate of change smoothed with a 3 day simple moving average.




I have shaded the area in yellow where volume was healthy as demonstrated by the expanding volume rate of change in the bottom window.  That meant that there was ample participation to push JPM shares sharply higher.  Following the initial push higher off of the July lows, something happened to the level of participation.  Notice how in early August (the end of the yellow shaded area) how the peaks in the volume rate of change (bottom indicator) began to turn lower accompanied by drops in intraday intensity and money flow even as prices pushed higher.  That was the first sign of trouble.  As prices pushed out to their September high, only money flow confirmed that move.  Prices have since corrected, and have pushed out to their latest round of highs, but volume rate of change continues to contract while the other two indicators are showing very prominent bearish divergences. 

These types of negative signals are all over the market now as volume is drying up and momentum wanes.  I am not saying that we are headed for a crash here, but I believe at the very least a healthy correction may finally be ready to unfold.  Let;s see if the market can continue to be propped up or if some semblance of reality sets in.