When a market is topping out at least temporarily you want to see certain things occur technically to verify the bears are gaining back control. The number one thing you always want to see is a gap down, and a decent one at that. Well, that's what we got early this morning, blamed mostly to Fed Plosser, the great hawk, who said we need to start raising rates. He always says it, but with the market overbought, it was an excuse to get those futures lower. The question that arises once the gap down has occurred is will the gap down hold meaning if it sells off after the gap down and closes near or on the lows. Volume needs to pick up and the gap down needs to remain open. No filling it and then collapsing. Leave a strong, nasty technical headache for the bulls to have to overcome.

So we gapped down, and, unfortunately for the bears, the gap down didn't run lower. It was gobbled up as an opportunity by the bulls to get back into their favorite froth stocks. The market reversed, and, for all intents and purposes, the gaps were gone fairly quickly. Another failure by the bears. It's hard to understand from an emotional perspective, since there are so many things going against the bulls here from intense froth to negative weekly divergences to grossly overbought monthly-index charts. Plosser was the excuse. The market gapped down, but, for some reason, still couldn't progress onward with the selling. We don't have to understand how this keeps happening. A total waste of your emotional energy. Look at the charts and let that amazing combination of price, along with oscillators, tell you the real story. Price is all that ever matters, and how those oscillators do or do not confirm. There is still nothing bearish taking place folks. We know it has to come at some point but still nothing bearish at all. Not yet.

Froth continues to accelerate unabated. The bull-bear spread now just shy of a terrible 41% (40.7%). You know the story under normal circumstances. This type of reading would lead to a huge pullback in equities to the tune of at least 5-10%, if not quite a bit more under the right conditions. And those right conditions do currently exist. They are overbought monthly-index charts and huge negative divergences on the weekly charts. One would think that the odds of a huge pullback are well over 95% likely starting just about immediately. Yet here we are with missed opportunity after missed opportunity by the bears to sell things off.

However, that said, missed opportunities can turn into one big score for the bears at any moment when you are dealing with this level of froth. Bears are at almost historically low levels with this phenomena having been a reality for several months now. Scary folks. Really scary. The bulls are relentless. The best they can offer up during a correction is to turn agnostic, but very few are actually turning bearish even if the market sells hard. So now we're above 40% again, and that means the double-red flag is up. Take note is the best advice I can offer up. The market doesn't have to fall. It can hang in there, but recognize the risk involved for getting too aggressive now. It can work out well if you do get aggressive, but be warned of the risk involved, and then do what feels right to you, of course. Froth is alive and well in the world of stocks.

Gap down. Run lower. Don't fill the gap. Let volume increase. Close on or near the lows. If all of those things happen in a given day then the bears have something to hold on to for now. Emotionally, I want to get bearish. Emotionally I can see many of you want to as well. I get it. Makes sense to hate equities here. Valuations are silly. Sillier than usual anyway. I'm talking about the real world, of course. If you use the rules above I just laid out for you then you can keep your emotions in check because until you see it happen you don't have to think negatively about equities.

The rule of keeping it simple. Makes life easier in this ridiculously tough game. If you follow simple rules of non-greed in this game, you can actually outperform the market or at least keep pace in this unfair game where the house has all the advantages. Staying away from earnings reports. Not chasing bear market stocks in a bull market. You get the idea. Move away from greed, and you have a much better chance of succeeding in a game where most retail folks fail and fail badly. You can have perfect set ups not work. The game is tough enough. That said, just keep it light, and more importantly, keep it appropriate and you'll likely survive. Don't definitely but likely.

Stay away from the biggest trap of all, which is playing by a belief system of what you think things should be versus what price is telling you on those charts.

Peace,

Jack

Jack Steiman is author of SwingTradeOnline.com ( www.swingtradeonline.com ). Former columnist for TheStreet.com, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

Mr. Steiman's commentaries and index analysis represent his own opinions and should not be relied upon for purposes of effecting securities transactions or other investing strategies, nor should they be construed as an offer or solicitation of an offer to sell or buy any security. You should not interpret Mr. Steiman's opinions as constituting investment advice. Trades mentioned on the site are hypothetical, not actual, positions.

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