Two key short-term indicators that we love to watch for trading are now warning of a market correction.

These two indicators are the percent of stocks trading above their 50-day moving average and the percent of stocks trading above their 200-day moving average.

Use the symbols $nya50r and $nya200r at www.stockcharts.com to view.

These two indicators osculate between over-bought and over-sold signals. When these indicators are below the 20% of stocks trading above their respective moving average and begin rising above the 20% level a rally is in play. When these indicators have 80% or more stocks trading above their moving average and then it drops below the 80% level, a correction is in play. This indicator works great in a trading market and less so if the market is trending strongly in one direction or the other.

Today the percent of stocks trading above their 50-day moving average is at 69.15% – falling below the 80% level. The last time the indicator was below 20% was in early July. What a great move since then.

In our view the market is in a trending mode – not a trading mode but we always want to respect this signal as a warning sign of a potential new trend change. At LOTM, we are still thinking buy the dips within a longer upward trend while on alert for the potential of a trend reversal.

The LOTM opinion on the market?

Bullish but with some warnings flags out…