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THE MARKET IS VERY OVERBOUGHT
Friday showed us how overbought markets can sometimes become even more overbought. I want to show you why I feel that we are close to the next big sell off. I will also caution you that these rallies can sometimes continue...even if stocks are extremely overbought. Knowing that a big move is coming and timing that big move are two different challenges. Although I have been expecting a big move down for a while now, my timing for t
hose bearish trades has not always been very good. This market rally over the last month has defied some high probability bearish signals along the way. Since we can't always time moves with exactness, we rely on patterns or indicators that signal high probability moves or outcomes. When the market ends up making the lower probability move, you just have to tip your hat and look to get em next time. My first bearish argument is the longer term weekly chart. It looks like we are very close to completing a "B" wave. If that is correct, we should get a wave C down that brings the S&P 500 to around 900 to 950. Although this possible wave B might still move up a bit higher, we are definitely at an area where we can expect a sharp sell off. The next clue I want to look at is the short term condition of the market. Look at the chart of the SPY. The MACD is very overbought and the MACD histogram is showing a bearish divergence. There was a similar divergence prior to the drop in August. The Money Flow Index is also extremely overbought. Now be careful. As I mentioned earlier, the market can sometimes remain in an overbought condition for some time. If you are in bullish trades, you should definitely take some profits...but don't liquidate the entire position. If you are anxious to get into some bearish trades, wait for some confirmation. You could wait for a short term signal...like a close below the 10 day MA. We had that l
ast Thursday, but the market shook it off on Friday. Maybe a clear close below the 10 day MA. The second reason I believe that a sell off is near is due to the extremely overbought conditions of some individual stocks...stocks that have led the rally. Look at AAPL, CAT, T, VZ, FCX, AMZN, NFLX, etc. These stocks are extremely overbought. It would take an incredible amount of buying to push those stocks up higher. With the longer term chart showing a possible C wave down and the short term charts showing extremely overbought conditions, I just can't see this uptrend continuing much longer. Today the markets reached the December 2009 high. We'll see over the next few days if this holds as resistance. In the meantime, get your put option trades ready and look for the market to close below its 10 day MA. If it does, you could use the stocks listed above for some put option trades. They would be considered counter trend trades, but they could have a big payout if the S&P 500 moves down towards 900.
hose bearish trades has not always been very good. This market rally over the last month has defied some high probability bearish signals along the way. Since we can't always time moves with exactness, we rely on patterns or indicators that signal high probability moves or outcomes. When the market ends up making the lower probability move, you just have to tip your hat and look to get em next time. My first bearish argument is the longer term weekly chart. It looks like we are very close to completing a "B" wave. If that is correct, we should get a wave C down that brings the S&P 500 to around 900 to 950. Although this possible wave B might still move up a bit higher, we are definitely at an area where we can expect a sharp sell off. The next clue I want to look at is the short term condition of the market. Look at the chart of the SPY. The MACD is very overbought and the MACD histogram is showing a bearish divergence. There was a similar divergence prior to the drop in August. The Money Flow Index is also extremely overbought. Now be careful. As I mentioned earlier, the market can sometimes remain in an overbought condition for some time. If you are in bullish trades, you should definitely take some profits...but don't liquidate the entire position. If you are anxious to get into some bearish trades, wait for some confirmation. You could wait for a short term signal...like a close below the 10 day MA. We had that l
ast Thursday, but the market shook it off on Friday. Maybe a clear close below the 10 day MA. The second reason I believe that a sell off is near is due to the extremely overbought conditions of some individual stocks...stocks that have led the rally. Look at AAPL, CAT, T, VZ, FCX, AMZN, NFLX, etc. These stocks are extremely overbought. It would take an incredible amount of buying to push those stocks up higher. With the longer term chart showing a possible C wave down and the short term charts showing extremely overbought conditions, I just can't see this uptrend continuing much longer. Today the markets reached the December 2009 high. We'll see over the next few days if this holds as resistance. In the meantime, get your put option trades ready and look for the market to close below its 10 day MA. If it does, you could use the stocks listed above for some put option trades. They would be considered counter trend trades, but they could have a big payout if the S&P 500 moves down towards 900.
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