Tom Stone sends: This rally is starting to get a little ragged around the edges. Some of the indicators still suggest that this rally has further to go, and it probably does. But enough of the indicators have gone as far as they probably will which justifies taking some of the money off the table and banking some of the profits.

On the bull side, we have the SP500 Bullish Percentage which usually gets to the low 70% range before petering out. It is now just below 70%. This suggests that we should get enough more out of this rally to win over a few more converts.

And there is the percentage of stocks trading above their 200-day moving average. That too usually gets into the low 70% range and it is still below 60%. It has plenty of room left to continue rising; a move which requires the market to rally further.

The McClellan Summation Index is still rising, which is supportive of the markets. It also has further to go, though the extend of its recent rise is consistent with the extent of previous bull market rises meaning that it could peter out soon.

For the bears we have the 30-day moving average of weekly breadth and volume breadth. These have both clearly begun to fall.

We also have the ratio of the 10 day moving average of up volume to down volume on the SP-500 (calculated using the 20-day ema of trailing up days divided by the 20-day ema of trailing down days). This has dropped from over 112% on September 25th to 106% currently and it is still falling.

And the percentage of stocks on the NYSE that are trading above their 50-day moving average has clearly peaked at a level consistent with market tops.

And last but not least, in the bear camp is the CBOE Put/Call Ratio. Although the 30-day (pink line) is still falling, the 10-day (blue line) has bottomed at slightly above 57%, the same level it has stopped at in previous rallies. This means that the 30-day will bottom also, most likely within 2 weeks. The 21-day average (most commonly used) is already reaching the levels that usually mark its bottom.

This rally probably has more life in it but it is getting tired. As I’ve said before, the easy money is to be made when all these indicators are at the bottom of the page and they have nowhere to go but up. As more and more of these indicators work their way out of these over-sold conditions and get back into over-bought territory, the harder and harder it will be to make money on the market.

Had you purchased DIG (ProShares Ultra Oil & Gas ETF) as recommended earlier, you would have gotten in at $87. It just closed at $117 for a gain of $30 per share, over a 34% return in two months.

The last two months we enjoyed the steep ascent that rallies start with. They then tend to go into a longer slow topping formation before they experience another correction. These topping formations can last anywhere from 6 weeks to many months during which the markets generally make multiple new highs. What these topping formations generally lack are the meteoric rises that the rallies begin with. The momentum languishes. There is more and more sector rotation.

We are now heading into the topping formation. It is very difficult to judge when the topping formation will end and the next correction will begin. Hopefully you have some nice healthy profits. Banking some of those profits now is prudent. Maybe move some your money from riskier stocks to more stable stocks; this will allow you to take part in further market rises while leaving you a bit less exposed when the next correction starts.

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