Three Developments That Tell Traders To Be Careful
Wall Street is always a battle.
The bulls have a list of reasons supporting their opinion prices, such as: economy slowly improving, unemployment situation improving, low interest rates, higher home values, decent earnings, the US is a better investment than anywhere else in the world.
The bears have an equally long list justifying their positions, like: the Fed will end bond purchases soon, so bonds will drop and become more attractive investments; also, the Fed won't be flooding the economy with money, the entire rally is Fed induced, the unemployment situation is worse than being reported and the under-employment numbers are super high, essentially this entire rally is more smoke-n-mirrors than real substance.
In the end, the market will decide what it wants to do. An investor/trader's job is not to guess what the next move will be, but to simply see what is happening, read the hidden clues and position themselves with the wind at their backs.
There may very well be a short-term top approaching. This is not THE top, but likely a local top.
S&P 500 (weekly) vs. 14-week RSI:
Even as a short term trader, it's good to back up and see the big picture from time to time. Divergences on weekly charts are not actionable day-to-day, but warn that a turn may be coming. Currently, there is divergence between the S&P and its RSI. This doesn't mean sell everything and go short; but it does mean have a plan just in case the market corrects itself.
S&P 500 (daily) (black) vs. the Percentage of S&P Stocks Above Their 10-day MA (smoothed with a 5-day MA) (green):
The green indicator below means that the percentage of stocks above their 10-day MA (on a short-term basis) reveals how much of the market is participating in a move. If the line lags while the S&P makes a new high, breadth is weakening and fewer stocks are involved. At first, it seems benign, but will eventually become an issue. Such is currently the case.
S&P 500 (weekly) vs. NYSE Cumulative AD Line:
This indicator rarely signals, so when it does, pay attention. In fact, the last time it signaled was the top in 2007. On this most recent S&P higher high, the cumulative AD line failed to match the progress. This means fewer stocks are participating, so while strong companies continue to push upward, weaker ones are falling off. In the near term this is fine, but eventually it can weigh on the market.
Do these three developments mean to sell everything and go short? Probably not, but it may to be careful on the long side. This is a time to take only the best setups and to keep losses small.
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