August 21, 2014

Technically, It’s Time to Sell (Near Term)


Hard to believe it has only been two weeks since the broader indexes had reached extreme oversold readings and dropped into support setting the stage for what I originally thought would be a much smaller bounce up.  That proved to be partially correct in that the markets did indeed put in near term bottoms and they did bounce up – but I was not expecting new all time highs for the SPX, near all time highs for the DJIA and new 14-year highs for the NDX.  The RUT continues to be the laggard amongst the equity markets.

To say it has been a slow grind to the upside under light volumes would be putting it mildly.  Let me say – watching paint dry could have provided more action than the persistent non-stop one-way trade.  Unless you were already long or bought each morning and then just waited until the close to exit for a profit there wasn’t much trading taking place in between.  At least that has been the case in several of the futures.

The SPX has gained 4.75% reaching new all time highs on Thursday at 1994.76.  That is an impressive gain no matter how you look at it.  The DJIA has climbed 4.25% and is within 125 points of producing new highs.  The NDX blasted 5.1% higher reaching additional new 14 year highs at 4049, which is just shy of resistance at 4054.  The 30-year bond continues to hover around the 140 area after surging higher as capital in search of a “safe haven” poured in last week.  Gold has again slipped below $1300 as the dollar begins to climb against the Euro.

goodbadAll of this is occurring against a backdrop of not very bullish news – but that has not stopped the buyers.  In fact it has likely encouraged many to jump in as the US economy gets jacked up on renewed claims of improving.  Its all a matter of how you run the numbers folks.  In any case, the reality is the markets have been on a serious upside tear.  Shorts have had to scramble to cover and while I can’t say with certainty due to the light volume if there has been any serious capitulation the relentless buying has sent many sellers to the sidelines. Adding fuel to the bulls fire are the financial media pundits taking bullish stances as traders rush in to get exposure to the long side of the markets.

As I always like to say – nothing goes up or down forever.  Eventually gravity will take hold and the tide will turn and here we are again at that crossroads.  The speed at which the markets have turned from extreme oversold to extreme overbought has been astounding, but more importantly to recognize is that the markets are now extremely overbought on a near term basis, which should set the stage for another correction.  What will turn the tide is anybody’s guess at this point since bad news is good news these days.  Many will say the markets are holding higher for some surprise revelation from the Jackson Hole meetings of Central Bank heads.  I’m not sure what they are expecting Ms. Yellen or Mr. Draghi to say, but from how the markets are trading I would imagine it would have to be a complete reversal of current rhetoric.  The FED would have to claim that the end of QE was a bad dream and that it will go on in perpetuity.  Mr. Draghi would need to pull a complete switch and raise rates from basically sub zero to – oh I don’t know 5% or so.  Who knows – the search for yield and a safe haven for capital has driven capital into the US markets by the truckload in the last two weeks.

It may seem logical to some that the algorithmic computers will continue to buy until the SPX reaches 2000 and the NDX 4100.  Is it that much of a stretch from current levels – not at all.

I may be going out on a limb here, but if you remember I have written before as to who had the biggest motivation to pump up the markets.  Logic would tell us the largest holders of stocks and bonds and that just happens to be the US Federal Reserve and the US Treasury.  If you need to sell huge equity positions without attracting much attention or starting a panic – well create a smoke screen and force a short squeeze before the economy and equity markets collide head on.

timetosellTechnically, it is time to sell.  There are several oscillators that have reached extreme overbought readings.  The stochastic oscillator being one, but as I have said before the stochastic can remain overbought or oversold for an extended period of time before the situation relieves itself.  An additional tool I keep track of is the NYSE McClellan oscillator.  The combination of the two produces a compelling picture that a correction is imminent.  The NYSE McClellan oscillator that I use is best interpreted as being overbought on a reading over +100 and oversold on a reading of -100.  This oscillator reached an extreme oversold reading of -292 on July 31st with the market dropping into support and turning higher on August 7th.  On Thursday, the oscillator finished the day at +161.50 with the SPX reach new all time highs.  While the markets tend not to bottom and top in perfect alignment with this oscillator the message is clear and that is stocks are usually higher or lower a few weeks after the oscillator reaches either extreme oversold or overbought.

While it may not be time to massively short sell the markets it is time to take some profits on long positions accumulated over the last few sessions.  If you were a day trader it would be time to begin looking for stronger sell signals as the markets begin to swing to the downside.  Volume should also be a key factor as two- way trade begins to lean towards hunting for bids rather than offers.

My primary trading platform continues to be the DTS Falcon and Eagle from Indicator Warehouse.  I use the ATR indicator in tandem with the ‘birds’ to generate buy and sell entry and exit levels.  I will be looking for stronger “sell” signals from the ATR to indicate a correction is underway.  Click here for additional information on DTS platforms and here for additional information on indicators.

keyinsandTrading the number remains key to being able to reduce and separate the “noise” from opportunity.  This takes knowing and executing a well-defined strategy and allows you to see opportunities amongst the “chaos” and by trusting the mechanics of your strategy, be able to take advantage of them.

Opportunity continues to knock on our doors.  While it doesn’t come without risk, risk can be defined and more manageable. Volatility and broad moves are exactly what a day trader desires and being able to respond without questioning is a luxury many are unaware of.

Steer the course and don’t compare yourself to everyone else.  You are not they and they are not you.  Remember to trust and believe what makes you unique at this moment in time and in this situation and allow others to choose for themselves.  Don’t be swallowed up by the chaos and false emotions swirling around.  Remember it’s just a number.

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