S&P500 reached 1503! It is due for a big pull back

We have witnessed a fantastic rally since mid November 2012. I'm out of long positions and went short on Friday right before market closed. The last leg of the rally (past 2 weeks) is ridiculous! Market screams over bought and as usually average investors are the last one to jump to the buying frenzy.
I'm looking to pull back to 1410 in coming days. on the other hand if S&P500 stays above 1500 for 2 weeks or more it means we are going to retest 2007 highs.

S&P500 should tank 3% in coming days

S&P500

We are extremely overbought. I'm looking for a minimum of 3% pull back from recent high. S&P500 has formed a new up trend channel in recent months see the chart in blue. The lower side this channel should act as a strong support level. I'm looking for a bounce from 1270-1260. On the other hand we could see a pull back to 1295 before we get the next leg up. But I rather see a meaning full pull back before I become bullish again.

Protesters arrested in anti-Wall Street rally

T-bonds are overstretched . You are too late, party is going to end soon!

S&P is in a classic down trend, it formed a bear flag witch is super  bearish. Please see my post for more info: http://the-us-microeconomics.blogspot.com/2011/09/channel-got-violated-know-what.html

This pattern gives me a target of  1050-1000 for S&P500, I'm a contrarian analyst; everybody is bearish  therefore I go against the crowd. I think we are in bottoming process but I'm  willing to change my mind if facts changes. I would stay bullish as long as 50%  Retracement level holds. Pay attention to 50% Retracement (see the chart, red  line) 1126-1120 it will be a very important support level. If we stay above it  we have a chance to move higher.

On treasuries, unless market tells me that after spending over 3 trillion  dollar on TARP (Troubled Asset Relief Program), PPIP(Public-Private  Investment Program ), TALF (Term Asset-Backed Securities Loan  Facility ), Economic Stimulus Act of 2008, QE1, Cash For Clunkers, Homebuyer Tax Credit, QE2 and Operation Twist, our economy is as uncertain as 2008, I would say there is not any justification behind buying Treasury bonds. I think  investors who bought T-bond made a big mistake and they are late in  party. I went short TLT (iShares Barclays 20+ Year Treasury Bond) at $123. I was looking to short treasury bonds for a while my target for TLT is $112 I will cover my shorts if TLT hits $112. I can't believe TLT reached the 2008 high! Treasuries are the most overblown asset class. Last week "TLT" reached the 2008 high, but it failed to stay above it, from technical point of view it is very bearish. To me last week move was short covering by treasuries bears who ran for the hills. Question is are we in the same position we where in 2008, is there any justification for these moves?  Please see the chart it would worth a thousand words.

Channel got violated, now what?

As you see in the chart above the pink channel got violated on heavy volume. This is what bears have been wishing for last couple weeks. There are 2 possibilities:

1) Bearish scenario: If S&P500 fails to get above 1180 with in next couple days it means we are headed for 1050-1000 level. Due what have has happened in last 2 days I will give 40% chance that S&P500 tanks to 1000 level.

2) Bullish scenario: if S&P500 could hold above 1100 support level it should rally to retest 1180 resistance level. If it could penetrate 1180, bears will rush to cover their shorts and bulls can sleep well. at this point I give 20% chance to such a rally.

 Greece Two Year Government Bond Chart:

Greece financial situation is a big unknown for many but in the eyes of professionals, it has improved compare with last week. Bond traders believe Greece default is eminent. Greece two year government bond yield has fallen sharply from its high, but it is far from normal levels. If Europeans succeed to manage a orderly Greece default, bulls could hope for a normalization of the market. Until then investors must be very cautious, because Greece default could have a ripple effects in world market witch will be bigger than Lehman Brothers bankruptcy. I'm a bear but after what I witnessed in 2008 and 2009, I have a hard time to go short. We don't trade in free market, and IMF or Fed interventions could easily shake the market. I sold my long positions when S&P500 was ~1220 and I have spent last couple days in the side line. Everybody is bearish therefore I will go the other way. I went long near the close. I hope my contrarian attitude would not cost me lots of money.

Is S&P500 forming a bear flag?

  

 S&P500 has been moving in a narrow channel. This channel could be the missing piece of the puzzle. In my last post I talked bout possible formation of a massive bear flag. Bear flags are very bearish formation. As you see in the chart above the pink channel could be a bear flag. As long as S&P500 stays in pink channel we are going to be just fine, but if this channel get violated S&P500 should tank to 1050-1000. At this point I give 20%chance to violation of channel.

   On the chart I point a down trend channel in blue color. As you see in the chart in last couple days there was 3 failed attempts to break out of the down trend channel, but every time it was un successful. You need to pay attention to 1175 as the most important support level. If S&P500 violates 1175 it would be very bearish. I believe we are in process to form a bottom, but due to European crisis. I’m not going to trust the market. I don’t have any long positions. I’m 100% cash. I don’t want to risk my money. I let others pick the bottom.

    On the up side 1200 would be the psychological resistance but the real resistance will be 1228 level. Next 2 days will be very choppy. Let’s see what is going to play out by next Tuesday.

Quick update on market and bear flag formation in S&P500

Market has become overbought. As far as I'm concerned S&P500 still is in the bear market territory. Therefore I had to reduce my risk. I sold most of my long positions yesterday. I made a nice profit in 3 weeks I could not let it go. I'm looking for +2% pull back soon. S&P500 has formed a bear flag(see the chart in pink). At this point I would give 10% chance that bear flag formation come to play, but we must be open to any scenarios. If S&P500 violates 1100 level, S&P500 would tank to 1020-1000.

I think there is at least 70% chance we get a pull back to 1200-1170 support levels then big institutions should jump back in and squeeze the market higher. Please note 1250 will be a major resistance in coming weeks. If S&P500 gets above 1250 it would be the clear signal for a nice bull run. lets see what is going to play out!