Wednesday, February 22, 2017

Stay cautious, but wait for the break

Mid-week market update: Markets behave different at tops and bottoms. Bottoms are often V-shaped and reflect panic. Tops are usually slower to develop. Hence the trader's adage, "Take the stairs up, and escalator down."

I have been writing that the US equity market appears to be extended short-term and ripe for a pullback, but that was last week and about 1% lower (see Why the SP 500 won't get to 2400 (in this rally)). I stand by those remarks.

I could say that the Fear and Greed Index appears to be extended and historically stock prices have had difficulty advancing further with readings at these levels.

I could also say that Ned Davis Research Crowd Sentiment Poll is also extended. Historically, stock prices have exhibited a negative bias at these levels (via Tiho Brkan).

None of this matters much to short-term traders. That's because sentiment and overbought/oversold indicators are less useful at tops than bottoms. While it may be timely for traders to tilt to the long side when panic starts to appear, market euphoria are not good trading signals of market tops. Savvy traders know to wait for a bearish break when the market gets overbought and giddy.

I am seeing some limited signs of a bearish break, but the trading sell signal is incomplete.

The full post can be found at our new site here.

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