Ingredients For A Top

Two weeks ago I wrote a piece, Ingredients For A Bounce. I believe we are approaching the opposite extreme and the ingredients are beginning to line up for a top.
  • Most rallies don't end until they suck in the majority of traders. We finally saw a move to the bull side by Rydex traders yesterday. While not at the extreme seen at the end of previous rallies, they have finally moved to the bull camp.
  • There has been a decent amount of call buying the past two days further showing that investors have finally bought into the rally.
  • The market is no longer oversold and will be maximum overbought by the end of the week or early next week.
  • There are numerous divergences.
The caveats are that the market can still go a few more days before it is maximum overbought, which would lead to a better selling opportunity. In addition, the days leading up to Thanksgiving are seasonally strong. Tactically, I will look to reduce long exposure and add to the short side gradually in the coming days. However, because of the seasonality I will likely not move to a very aggressive short posture.

1 comment:

Anonymous said...

Still waiting for the new S&P high, DOW has blown through. DOW fast approaching the 50% level (of total move down), S&P still has about 20 points to go.

Okay, getting new S&P high right now, let's see the follow through. I would not short yet, we are on a one way runaway train...

JD