The market could very easily — and probably will — crash!

When the market starts to sell off, the very best the bulls can hope for is a 13% sell-off. That would be a mere 50% retracement of the last two-month advance.

What’s more likely is at least a swift 20%-22% sell-off. That would be a test of recent (March) lows on the S&P 500 (SPX). We’ll only know how real the last two months of gains have been when we witness the force of the next sell-off.

There are so many things pointing to a sharp sell-off in the very near-term future, it’s amazing. The only thing — the very last signal I need to see before becoming an aggressive bear — is a weakening of the internal market.

Market internals have been strong. But everything else says to look out below.

Think about the following:

1. Seasonality.

We have entered the weaker half of the year. Typically, the market sells off in May. So why didn’t we see that this May?

Well, we crashed so hard recently, that we had what’s called a “dead-cat bounce.” When a dead cat falls from such heights, with such speed, it’s bound to bounce. So when there is so much scared cash on the sidelines, there is bound to be a strong bounce.

2. The reality of the latest advance.

Was it huge demand? Perhaps. But it’s not as strong as you might think. Think about how much short-covering we just witnessed.

When investors short-sell stock to profit from a decline, they have to close out their positions by buying back stock — thus adding to the upward pressure you’ve just witnessed.

And short-sellers weren’t only taking profits buying back stock; they were also getting hammered and buying back stock — closing out losses — because of their bad timing!

It’s the same idea as why even smart investors kept buying at the top when the top was so obvious. Flip it around. Pessimism was so strong recently that, even though investors saw signs that the market would have an intermediate recovery, they sold short at the wrong time.

Many did so after seeing the 2002-2003 low was broken, and others sold short after only a slight bounce in early March. And when the market just kept ripping higher, they were forced to close out the short positions (by buying back their stock), which added pressure to the manipulated advance! (See also, Blame It On a Short Squeeze.)

So, a lot of this buying was short-covering — not bargain-hunting. That’s always how the first bounce in a bear market bottom happens. This means there is likely either a retest of the lows, or lower lows, coming.

We will know how much real demand there is soon. There are lots of bearish stories about to hit the tape in the coming months.

3. The market is now way too complacent.

We see this in the CBOE Volatility Index (VIX). It’s lower than it’s been since the market was about to get smashed in September 2008 (right before the market crashed by about 30% in 30 days and ultimately lost half of its value). That means we are seeing the highest level of complacency since then.

4. This was accompanied by a Moving Average Convergence/Divergence (MACD) sell signal (red circle on top chart) and a Relative Strength Index (RSI) sell signal.

The MACD put the sell signal in after making it to heights not seen since the 2000 top, or perhaps the high seen in mid-2001.

5. The market is internally overbought.

In fact, the market is as internally overbought (in the intermediate trend) as it was in July 2007, when I started recommending that The Trend Rider members start going crazy buying put options on the brokerage firms, including Bear Stearns, Merrill Lynch, Morgan Stanley (MS) and about eight others.

The only difference was that the internal indicators showed supply in control, as opposed to demand being in control right now.

So, don’t get me wrong; I’m waiting for the final (internal) shoe to drop. But when it drops, this market will drop like a hammer.

Chris Rowe is the Chief Investment Officer for Tycoon Publishing’s The Trend Rider. To learn more about him, read his bio.