Week of July 22, 2013
Take a look at whatever financial pages and television programs happen to be nearby. Commentators can't stop talking about how strong the stock market is, and they're right. The Dow is at an amazing, record-breaking high, and just look at the strength of the Russell 2000 index.
Stock market bears have been beaten, beaten, beaten. They were wrong, and they know it.
Listen to the enthusiasm on CNBC. Sure, not everybody is telling investors to jump in with both feet (although some are), but the mood has changed. There's optimism again. Look at the wounded bears running for cover.
Remember this sense of victory. This is what it feels like when a market is topping.
Now, we're not calling for a market crash. That could happen, of course, but whether it will is a different question. We're saying that, when you start to feel there's a consensus about where the market is going, that's a good sign the market is on the verge of changing direction. A market requires many viewpoints and two opposing sides. When there are no more bears left, then the heavy hitters know they have squeezed about as much as they can out of the other market participants. They have convinced the bears to admit defeat, and they have brought as many small investors into the market as they can. Then they get ready to reverse course.
Some traders make a hobby of studying magazine covers to gauge market sentiment. When the headlines start implying "up and up to infinity and beyond," those traders hear a little bell ring. They know it's time to get wary and look for reversal signals in the actual price data.
Right now, there are plenty of potential reversal signals. The other major U.S. stock indices are making new highs, just like the Russell 2000, but with substantial negative momentum divergence.
And one of the broader U.S. indices -- the NYSE Composite -- isn't keeping up.
The big indices in Europe are less enthusiastic. No new highs over there.
Meanwhile, the best peddlers of market bullishness are telling you that mixed economic data and mediocre market indicators are fantastic news.
Don't fall for it. If you're anything other than a very nimble trader -- quickly in and quickly out -- taking a long position in this stock market is horribly risky. That doesn't necessarily mean it's time to get short. We cover questions about timing and trading signals in other articles on our blog.
Bullishness is getting overhyped. It's also getting mentioned more frequently on the internet.
We aren't telling our blog subscribers and site members to get short. We're just telling them to be wary. Something's changing in the air.
At TOTM, we had a great time trading the markets in both directions last week, but only on an intraday timeframe. Take a look at the weekly summary. Even if somebody didn't catch every one of the trades we identified in real time, there was still a lot of money to be made if they caught even half of them. The chart below is for "ES" the S&P 500 mini futures contract.
On Monday, we caught the slow trade up from morning support. Some closed out positions late in the morning, and some exited the trade mid-afternoon. At the end of a trade, "TMAR" means take the money and run!
Tuesday surprised us with how far ES dipped below support. We expected it to find a base about 3 points above where it did, so our initial long trade was stopped out. We still looked for long trades from lower support though, and those proved successful.
Wednesday was Bernanke day, with his testimony putting markets into "standby mode." The morning high was a good fade for several points to the short side, but not everybody took that trade. As we said, it was an aggressive trade.
Thursday also was Bernanke day, but the markets ramped up strongly prior to his statement. We were looking for long trades and jumped on the early morning climb. Some traders took partial profits at the first "speedbump" resistance, and some stayed completely in until ES reached more a important target higher. As the afternoon wore on, we warned our members that any more long trades were a bad idea. Anybody looking for afternoon continuation upward had to be fast, or they got slammed. The market fell even harder after the regular session close.
Friday's trade was again to the upside. (Notice how few short trades we recommended all week? There were some, but mainly we stayed with the trend.)
Are you ready to move beyond bias and trade these volatile markets with confidence and objectivity? Do you want to learn how to trade multiple markets with a toolkit that has something for every market condition? At TOTM, we offer a subscription that's tailored to the needs of swing traders and another subscription that gives intraday traders a real edge in ES and other highly-traded futures contracts. Find the service that matches your trading style, and try it out for a month. Just watch how your perspective on the markets changes during that time.