Hang on, bears! We may be near a top.
Experienced traders see it differently.
The stock market's job is to separate the public from its money. So it will do whatever it takes to keep as many people as possible on the wrong side before making a key reversal.
Yes, that's a cynical view. But having been involved in the market for the past 25 years and having seen how few public investors ever make any money in stocks, a little cynicism is justified.
Think about what happened in late February and early March. The stock market was violently oversold. Many technical indicators were starting to display bullish characteristics. And I cautioned we might have been on the verge of a major rally.
But stocks kept falling. Every brief rally attempt was hit with massive selling pressure and stocks could not catch a bid. The public sold stocks en masse and ran up the largest cumulative short position in history.
We all know what happened next.
Today, we have the exact opposite situation. Stocks are violently overbought. Most technical indicators are bearish. And it looks to me like stocks may be poised for a massive drop.
Yet the market keeps rallying. Every attempt to sell off is met with persistent buying pressure. The public is desperate to buy into every dip out of fear of missing the next big move higher.
Yesterday's heroic eight-minute rally (from 3:15 p.m. Eastern time to 3:23 p.m. Eastern time) erased a 100-point decline and pushed the Dow up 50 points. This is just the market's latest attempt to suck in the public investor and shake traders out of short positions before a more sustained decline takes hold.
Of course, I know how paranoid that sounds. But I've seen this movie before and the ending is always the same.
The weight of the negative technical indicators may eventually press the market lower. There's no way to tell, though, from what level the selling will start and what the catalyst will be for such a move.
Yesterday's gap-down opening had the potential to kick off a sharp decline. But the bank stocks were showing strength. That strength led to a late-day reversal for the major averages.
There's absolutely no way I can recommend buying stocks here. Not with the multiple bearish indicators I've pointed to over the past few weeks.
At the same time, however, I don't want to get too aggressive on the short side until we finally see weakness set in and hold. A move below 923 on the S&P 500 should do it.
Best regards and good trading,
Jeff Clark
Growth Stock Wire
Editor's note: Veteran trader Jeff Clark is author of Growth Stock Wire, a daily read providing investors with a pre-market briefing on opportunities in the global stock, currency, and commodity markets. Click here for more information… and a free report on the best ways to trade options.
Any strategies discussed and examples using actual securities and price data are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. In reading content in the Community, you may gain ideas about when, where, and how to invest your money. Although you may discover new ideas or rationale that may be compelling, you must ultimately decide whether or not to put your own money at risk. Consider the following when making an investment decision: your financial and tax situation, your risk profile, and transaction costs.
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Comments
Follow commentsC.B. Trader posted June 12, 2009 (01:10PM)
Thanks for this I know i feel the same way that a reversal is inevitable and since I already missed the rally I should just weight but it is hard to stay disciplined with all these rally's but thanks for another reminder of staying my preset course.JJL posted June 12, 2009 (03:27PM)
I think you might be right ill probably sell off and stay in cash.idid posted June 12, 2009 (04:11PM)
I have noticed that some of the stocks that normaly rise and fall with the market prices, are not of late. They have large volumes, but remain within a few cents of open and close through out the day. Drys, of late has stayed within about a .20cent price range with a volume of 12 to 15 million. Now, this time of year, Fro, Drys and Egle should be trading up and down some what more than that. I think I will stay in mostly cash, a few calls on some mining stocks, and wait and play the earnings runs.WeirdUncleJesse posted June 12, 2009 (04:54PM)
I, too, think the Market is a bit overbought. However, I don't think the rally is quite over yet. The Market almost always overcorrects. I think one of 2 things must happen before the Bears take over:1: Some major event, like maybe, riots in Iran over their elections interupting the flow of oil.
or
2: The S+P knocking on 1K's door.
So if nothing shocking happens, I'd say we have another 50 or so on the S+P before it's really time to get out. In the meantime, I'd advise keeping your stops close, or grab some protective puts or collars.
Hmmm.... looks like I better start following my own advice first thing next week....
~~Weird Uncle Jesse~~
DavidDT Trading-to-Win.com posted June 12, 2009 (05:38PM)
Jeff - very nice post/observation(following is not addressed to Jeff or people who commented before my comment, but rather to "whom it may concern" )
there is no such thing as overbought or oversold (tell it to some poor sucker who sold on oversold and got erased by margin when market stayed overbought another 2 months)
There are only suckers of all calibers: suckers money managers with hidden agendas talking on CNBC, sending you "investment" letters, etc
suckers who listen and don't have their own opinion
suckers who believe that there is "set it and forget it"
suckers who are perma bulls or perma bears
suckers who buy investment advise and attend seminars of "great traders"
suckers who think that they can learn nothing from others for free
and most importantly, suckers who think that it is easy to make money in stock market without 24x7 hard work/studying
list goes on...
so good for me that there are so many suckers and I am not the biggest sucker of 'em all :)
few current myths
1. "bonds will collapse" - WRONG - they just set for a nice long trade
2. "commodities are the place to be"...get real, may be nat gas (hello Gartman), but not food commodities or stuff that can hurt your leg
3. "dollar is doomed" - sure, I will buy it from you, no problem
4. "Motley Fools are smart!" - not even funny
incubus posted June 12, 2009 (07:38PM)
In swing trading, in an uptrend you favor the dips with long positions, then in a downtrend do the reverse.DavidDT Trading-to-Win.com posted June 12, 2009 (09:40PM)
incibus"The trend is your friend...until it ends"
We can trade both ways, I agree that swing trading is more appropriate into trend...the big kahuna question is - we don't know when trend will reverse and that is when trend follower getting hit harder than people who manage their risk and trade against the crowd.
incubus posted June 12, 2009 (09:59PM)
You'll remember the old Billy Crystel skit from SNL..."Don't ya hate when...."DavidDT Trading-to-Win.com posted June 12, 2009 (10:05PM)
respectfully disagree - my quote is:"Knowing does it"
take a look at this chart
DJA weekly
http://screencast.com/t/yypwxnNNqR4
DavidDT Trading-to-Win.com posted June 12, 2009 (10:08PM)
Incubusone more thing - I did spot March 6th, as well as many other great trading opportunities during the years when "bagholders" where burnt to ashes
http://trading-to-win.com/ExamplePort.aspx
incubus posted June 12, 2009 (11:01PM)
Dave, March 6 was just another "dip in the crowd" to me.fluxilla posted June 12, 2009 (11:08PM)
Lots of people have commented similarly on this [good] post. It's true, public investors rarely make sustained long term money, but we should ask ourselves: why?Everyone can see that it's been an unusual bull rally; sure, there are now some bearish technical indicators in the indexes, the VIX is all over the place, yet we keep going sideways or a little bit up. Are we headed for a major tank? How is the Iranian PM election going to affect the market? The butterfly effect works long and hard in the market, and the best thing I have found is to take the simple advice from O'Neil:
Observe, research, buy competent companies, set a gain sell point (10-20%) and set a loss sell point (5-7%). Play your option spreads conservatively, and be ready and WILLING to get out if things go bad. I'm not the world's greatest trader, but I do my research. I make mistakes, I learn from them, and, most importantly, I get out when things go bad so that I'm not left holding the bag when a company goes to hell in a handbasket.
DavidDT- good myths! Is motley fool anything more than spam? All their articles read like a Sham-WOW commercial, without the benefit of hookers.
WeirdUncleJesse posted June 13, 2009 (09:37AM)
Flux - Rioting in Iran would effect the market for the same reason anything else would effect the market -because people think it would. That's the only reason anything effects the market. It's what markets are - a conpendium of public opinion.
Anyhow - Inky's right. It's rude to hijack a blog :-) Back on track ...
How long do folks think the coming cownturn will last? Personally, I think no more than a month or so, and won't be too bad. If the commentators are right, there's a lot of money on the sidelines getting very bored. It's looking for an entry point.
Anyhow, that's my opinion, take it for what it's worth - just a few keystrokes.
~~Weird Uncle Jesse~~
TK All-star posted June 17, 2009 (03:25PM)
Thanks for the great feedback, everyone. Last week, it felt a little too early to aggressively short stocks. On Monday, that may have changed. Right now, I can only find three stocks to buy... and 397 to short or avoid. I'll give you some details in my next All-Stars post. Watch for it!Regards,
Jeff Clark
GrowthStockWire.com
TradeKing All-Star Commentator
DavidDT Trading-to-Win.com posted June 18, 2009 (12:09AM)
Jeff,it always takes more guts/skills to FADE strong trend.
I, for one, was wrong many times...for few days :)
Great call, hope you were on POTlike trains to hell
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