Signs of a Top forming ............. Caution!

Below you will find three charts of indicators that tend to provide a reasonable indication that a "CIT - change in trend" is close at hand. The FED will give us an indication of their thinking on the economy on Wednesday. The markets are waiting to hear that  the next installment of easing (QE3) will be coming some time in the 1st quarter of 2012. This news would likely rally the markets for a few days to a few weeks. If the FED does nothing but confuse the markets, its likely, a size-able decline could ensue.

The technical indications from the market seem to be saying that the rally is tired and most of the bulls that wanted to buy stocks have already done so. Any bad news will provide a convenient signal to sell in order to alleviate the complacency that has built up over the last several months.

The chart to the left is day graph of the CPCE or the put/call ratio for equities. It is a very good indicator of when the market is in an overly bullish state or an overly pessimistic state. Each condition is likely to generate a reversal. Note: we are currently on a sell signal for this indicator.

The NYSE advance versus declining issues is another good indicator of when the market is entering extreme conditions. Turns tend to follow the market extremes.

Here's a comparison of the SP500 index shown in grey (area chart) with an overlay of the Banking ETF-BKX. The SP500 has a significant percentage of its shares in the Banking sectors and they are a good indicator of the overall economy and market direction. The stochastic indicator in the lower window is beginning to rollover indicating a change in direction maybe near.

You need to pay particular attention to how the market reacts to news for the rest of the week. We  are setting up for a sizable move lower and protecting your profits would be a good thing to do.