Stock market trend: Up, Strong Risk of Pullback or Trend Reversal
For the last month, I’ve been warning about the possibility of a either a market pullback or bearish trend reversal. During this time, I’ve moved much of my own portfolio into cash while hedging my long term long holdings (primarily GE leaps). While the US stock markets have continued to rise, albeit at a slowing pace, technical analysis continues to indicate an ongoing deterioration. As Market Edge writes in this week's Market Letter:
“The technical condition of the market deteriorated once again last week as the Momentum Index remained in negative territory while the Strength Indexes fell further into bearish ground. While the DJIA was posting new recovery highs last week, negative divergences continued to develop suggesting that the move may be suspect. The 14-day RSI, which is a short-term momentum indicator, failed again to confirm the DJIA's recent high. Also, the Up/Down Volume Ratio for most of the major averages continues to lose ground. This indicator, which is a measurement of accumulation and distribution, typically tops out prior to a significant decline. Finally, the market is in a very overbought condition as evidenced by very high stochastic readings and the near record high level of stocks above their respective 50 and 200 day moving averages.”
For those of you who consider technical analysis to be some kind of "voodoo," my view is that there is almost always an underlying fundamental analysis explanation for technical phenomena. The big picture here is that the underlying US economy along with Europe, Canada, Mexico, and numerous other weak spots continue to grapple with high rates of unemployment and the high likelihood of growth rates well below potential output. The latest earnings reports have been mixed at best and have therefore not provided the necessary fuel for a strong breakout above current market resistance levels. The fact that the Dow broke through 10,000 and then fell back last week should at least be a mild warning sign to anyone who thinks this bull market may not be at risk.
My broader philosophy here is that it's better to protect the large gains many of us made since the March lows than to give back a significant chunk of that profit by engaging in unprotected trading during a period of high uncertainty when the risk of a pullback or Trend reversal is at least as high as a follow-through on the current bull market.
Last take: Check out the biotech penny stock DUSA. It just broke through a major level of resistance and is poised for a possible upward move.
Trading the Dollar/Yuan Pair
If you want a trade with virtually no downside risk and an almost certain strong upward move over the longer term, check out my latest contribution to theStreet.com. It offers up a way to speculate on the eventual decoupling of the Chinese yuan from the US dollar. Click here.
Other Things You Might Like
- Volatility Edge in Options Trading, The: New Technical Strategies for Investing in Unstable Markets (paperback)