Market Update 8-31-2009 Summer Almost over and so Might be the Rally?

It has been a month since I last updated and expected a 10%+ rally in the markets to the retrace zone. So far that has played out quite nicely. The corrective moves I expected in between haven't been the cleanest, but overall the continuation of the summer rally has not disappointed and has satisfied my expectations. Compare the attached chart to the one from last month.

Right now, though, there are reasons to be cautious. It looks like the market may be playing out a 4th wave triangle the last few days which would be a warning sign that the top could be coming soon.

There are also other reasons to be cautious such as the negative divergence showing between a few key indicators and price (see chart). Also, bullishness is at a peak as the Bullish %s are higher than they have been since 2006 and anytime since the rally began. Another item I continue to watch is the weak volume. It is expected over the summer and in particular August, but it has to raise a caution flag as the rally continues on less and less volume.

I have also attached a longer term chart of the markets below. Notice how miniscule the rally of 40-50% looks compared to where we were in 2007 as well as 2000. This rally is following very closely to what occurred in 1931 after the crash but before another huge brutal move down to the ultimate 1933 bottom which is another reason to be cautious.

Summary: I will be looking to get short before I get long, but will wait for more confirmation before I make that trade. Now is a good time to take any profits on longs as the risk reward is now high for those positions.