 The equity market has been driving technical analysts crazy for the better part of a year as it continues its, seemingly unstoppable, advance. Many of these analysts can be heard to complain that 'this time is different' due to the shenanigans of the Federal Reserve Bank and its Permanent Open Market Operations (POMO). This is the process of injecting cash into the financial system every week through the purchase of bonds from the big investment banks, many of which were issued by the US Treasury only days before. The long term picture has appeared to these technicians as negative because the entire push up since March, 2009 has been an advance comprised of overlapping advances and retracements. Technicians like to see an advance with an "impulsive" nature. That is, one where the last pullback doesn't overlap the top of the previous advance. When an overlapping advance unfolds, it is thought that the advance is against the bigger trend. In this case it would mean the current advance is fighting a bigger downtrend. For all their worries, the big daddy of technical analysis (and one every investor should keep an eye on) the cumulative advance decline line, has not given any sign of an end to the bull market. The A/D line normally will diverge from the equity market anywhere from a few weeks to several months in advance of a bear market. That is, while equities continue their advance, the A/D line will start its decline in advance of a market top. In the first chart the green lines mark divergences in the A/D line (top window) from the S&P 500 (bottom window) as far back as 1998. As good of a job as this indicator has done in the past it is not perfect. Note that it totally missed the October 2007 top.  In the near-term, however, it does appear the market is ready for a rest, at least, if not something bigger. A whole slew of indicators are flashing red lights for the immediate future. Many of these indicators have been flashing red for some time and yet the markets continue to climb. One particular indicator, however, which has done an excellent job of calling short-term tops, is the VIX, or Volatility index. Readers can find a technical description of the VIX on the internet but in layman's terms it is a sentiment indicator. Sentiment is a contrary indicator; when most investors are bullish, that is a negative. By contrast, when most are fearful, that is a positive. When investors are fearful (near market bottoms) the VIX tends to be high. When investors are complacent (at market tops) it tends to be low. Since the market high in October, 2007, the VIX has done an excellent job of calling tops anytime it fell to a level under 16. It closed last Friday at 15.93. 
Ed Carlson CMT, is a Chartered Market Technician and Chief Technical Analyst at SeattleTechnicalAdvisors.com. He hosts the Market Technicians Podcast program and is a frequent contributor to SFO magazine. The opinions are strictly those of the author(s) and are provided for informational purposes only. No investment should be made as a result of this article without your personal due diligence and research, and with the counsel of an investment professional. | 
