Sam, I think you overstate the case for bearish divergence. For one thing, I am not at all sure you can use BPI that way in any reliable fashion. I don't routinely follow BPI, so maybe I am missing something here, but my understanding is that BPI is simply an indicator of market breadth that mostly indicates relative overbought/oversold status, as opposed to a technical/momentum indicator.
Looking through the various technical indicators on the various indices, there are clear signs of bearish divergence in some, but in others the evidence for bearish divergence is not particularly significant (e.g., INDU). Overall, I don't see a compelling case for bearish divergence of the magnitude that would precede a major correction. I would like to see something like what we saw in November and December of 2004 that clearly presaged the medium-term correction from late Dec. 2004 to late April 2005. I just don't see that at this point.
Actually, this is surprising to me, because for months now I have expected evidence to develop that a major top was at hand, and would be immediately followed by a strong, multi-month correction. But I just can't find the evidence for that scenario, at least not yet.
So far as INDU is concerned, I see very few chinks in its armor technically on either the daily or weekly charts. INDU has blasted right through the rising wedge that so many have spoken about over the past several months, and today closed at yet another 6 year high. In fact, INDU is nearing blue sky---today's close puts the index only 3% below its all-time high set on Jan. 14, 2000.
That said, I think the INDU is about to top out here, probably in the next session or two. I think more significant than the fact that INDU is closing in on the all-time high and the obvious resistance that represents is the fact that INDU is just a very short step below the upper rail of the regression channel dating back over a year that defines the medium-term trend. That overhead has repelled the advance of INDU twice in the last 6 weeks.
I think it will do so again very soon. How far it will pull back remains to be seen, but personally I'll probably exit the long position I have entirely and look for a short entry within the next few sessions (assuming I see sufficient evidence of technical deterioration). Possibly, that may take a week, and we may even see the all-time highs met or even exceeded on an intraday level first.
Actually, I would prefer that, since that will likely be accompanied by extreme bullish sentiment. That is another missing piece in the major correction scenario---we simply have not yet seen the kind of bullish sentiment that typically accompanies a significant market top. Such a development would make a medium-term short position much more reliable, IMHO.
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