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As unbelievable as it seems, the (SPY: 142.66 +0.09%) and Nasdaq are back above their 200 day moving averages. The SPY is about 4 points away from going positive year-to-date. By any measure I am aware of, we are no longer in a bear market. Although the Dow Jones is still just beneath its 200 day average, is their any doubt that it will not soon overtake it? 

Since the bottom in March, the indexes have gone straight up, with a few pullbacks along the way. This kind of up trend is confirmed by the VIX, which is near its October lows. “Why be fearful? Just get drunk and buy stocks!” says the VIX.

The Nasdaq has put in a beautiful saucer-shaped bottom. Except for the index going straight up, for 2 months in a row, I can’t find much to be bearish about, technically. The RSI(2) is at levels that typically coincide with pullbacks, but as of yet, there is no indication that the market wants to do anything but keep going straight up.

Yet, there is still something that doesn’t feel right about the whole ordeal.

I mentioned a month or so ago that I would not be surprised to see the indexes get close to positive, suck everyone back in, and then reverse. The Nasdaq has ran up 15% since its bottom in March. MACD is not confirming the move, and we are entering a period of seasonal weakness. Today’s close on the Nasdaq and SPY put both indexes above the upper Bollinger Band. For these reasons, I’m expecting another quick pullback, in the short term. Longer term, my guess is that the indexes will not get very far into positive territory for the year before experiencing a significant pullback of 5-10%.

I was able to get my trader (wife) to close out my (DDM: 79.94 +0.04%) trade about 20 minutes from the close today. It was profitable, +1.25% Upon examining the trade this evening, I realized I have closed the trade early. Let me explain.

I was able to check Stockcharts several times today, and at one point, RSI(2) on DDM was 79.90. I figured that was close enough for me to close the trade. I checked yahoo later in the afternoon, and the indexes looked to be reversing. I went ahead and closed the trade, instead of waiting for tomorrow a.m.

After looking at the chart tonight, I have realized that Stockcharts only records the RSI(2) on a closing basis. Also, I have been testing the system with RSI(2) triggering a trade on a closing basis. Therefore, this trade should have been left on, to wait for a close where RSI(2) > 80.

Making matters worse, I bought (QID: 37.44 -0.08%) and (SDS: 54.67 -0.31%) at the same time, as it was my belief the RSI(2) was < 10. Again, I made a mistake. While RSI(2) was near 4 at one point today on the QID, like when Dogwood bought it, it closed in the 40s. This trade would not have triggered, since RSI(2) was not < 10 on a closing basis.

This exercise raises an important question: What will the results be when I can have this strategy trigger when using hourly bar readings of the RSI(2)? That was rhetorical. I’m just really curious to find out.

An obvious benefit of using the RSI(2) trigger on a closing basis is that it guarantees the etf is truly oversold or overbought before triggering an entry/exit. Using the appropriate criteria, the trader can get in and out near the bottom and top of the swing.

Today, the QID RSI(2) was below 5. After the afternoon reversal in the Qs, the RSI(2) closed well above 10, likely near 30. However, the strategy still triggers a buy on the open of the (QID: 37.44 -0.08%).

I was also watching the double short S&P (SDS: 54.67 -0.31%) and I swear the RSI(2) was reading around 8, late morning. Thus, it too has signaled a buy on the open. Strangely enough, Stockcharts now does not show that the RSI(2) dipped below 10. For this reason I’m not comfortable saying that the trade has triggered.

Full Disclosure: I bought 100 QID and 100 SDS just before the close.