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Good morning,

The Dow continues to lag the bigger SP500 and the NASDAQ. Yesterday I wrote that the black-box system gave a buy-signal. I will actually go against that now. I think we are about to see a move lower in the main indices such as the Dow, the Nasdaq, and the SP500. I feel the sentiment is at an extreme, as measured by the $vix indicator. I am not the biggest fan of this index as it has given me wrong signals before. However, I use this as assistance in my confirmation for a trade. The $vix symbolises complacement amongst investors.

I note that Google is beginning to lose momentum and I continue to hold a short position in Google. This stock for me more than any other indicator symbolises the froth in the market right now, and as it begins its move lower I think it will take the general market with it.

I am already scaling into short positions in the FTSE and the DAX this morning, and I will add to it on weakness. I will not add on strength in case I am wrong. One of the keys to my argument will be the SP500. I will be inclined to think I am wrong if the SP500 trades above 1232 in the cash market, particularly if it closes above it. Given that we closed at 1231 it is most likely that we will see a move above 1232, at least intra-day. I will short the SP500 below 1228 and should really buy above 1232. However, I will not hold long positions overnight anymore until we have seen a correction. How much am I expecting the market to decline? I don’t think the final top is in yet. I think this is more likely to happen late in August. The 24th August stands out as the date to look for a change in trend. However, the 24th could be a lower high. Until then we could easily see the Dow moving down to 10,400 very quickly.

The chart below is not my work. A very astute gentleman named Mike Bell sent it to me. The chart shows a fractal of the SP500 on the daily chart ( the is the lower chart in the picture) and a fractal of the pattern. If this pattern is followed, it means that the SP500 is just about to turn over and head significantly lower.

I worked out my timings last night and I realised that I wanted to be short now. A move below 10570 in the Dow will give it the deathblow like we saw in 1990, which also took place towards end of July. I have attached this chart as well. Mike’s chart just sealed it for me when it arrived this morning.

I had a look at a gold chart yesterday. It looks to me as if this market could be headed towards $400. If this is the case the US dollar will significantly strengthen against key currencies over the coming weeks. This is one to look out for.

Oil continues to hover around my pivot of $59.20. I got stopped out of my short position, and I am watching it for now.

The key to the general stock market will be major stocks like Google, Ebay, IBM, MSFT, GE and Motorola. If these stocks begin a move lower, they will take everything with it. It is likely we will see a good two hard down days now followed by a small rally in the first couple of days in August. I however believe the market is topping. The positions are in, the stops are in place, the add-ons are lined up. Let the game commence.

Good luck today