When using technical analysis, one is prone to 'head fakes' and other situations that arise from using single dimensional analysis of prce and volume.  A tool I have developed to allow a deeper look into the market is the Risk Flow Indicator (RFI).  The RFI measures flows between sectors and groups to give a plot that easily identifies whether or not investors are embracing or moving away from market risk.  Very simply, risk is the fuel that sustains rallies.  When investors shun risk, rallies die.  When they ambrace it, rallies flourish.  Indicators such as this can help gauge the strength underneath the rallies to determine whether or not a rally is likely to continue or fail.  Using simple technical analysis indicators can provide valuable insights, but are also prone to divergences and false moves lower as the rally continues. 

In the chart below I have plotted the Nasdaq Composite along with the RFI in the lower pane.  Notice how the RFI topped out on January 8 and began to deteriorate while the Nasdaq Composite struggled to post its closing high on January 19.  RFI weakness told us that investors were shying away from risk, ths leaving the door open for sellers to take command just as we saw last week. 






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