2 things to keep in mind
The market put in another strong day today with all the major
indices posting new multi-year highs. There were also solid breadth numbers.
This included an expansion in new highs. The NASDAQ finally posted more new
highs than at its previous peaks of 10/16 and 10/26. This could be a good sign.
Improved breadth may help to carry the market higher a while longer even if
momentum continues to diverge.
In my last two columns I’ve discussed some reasons why I
believe the markets shifting from trending to oscillating and possibly forming a
top. I suggested on Monday that the best way to play an oscillating market such
as this would be to play the overreactions. The market seems bent on putting my
theory to the test right away as it ran up rather strongly the past two days and
is starting to get overextended, though not dramatically yet. The NASDAQ and S&P
did close today above their upper Bollinger Bands. Meanwhile, the VIX closed
about 5% below its 10-day moving average. Still, in up trending markets, it’s
difficult to know when overbought is overbought enough. Aggressive traders who
believe as I do that we are entering an oscillating, rather than trending market
could begin to probe, or scale-in on the short side.
Personally, I would prefer to see a gap up or move even a
little higher in the next day or so before entering some on the short side, but
I do expect we will see a reversion to the mean fairly soon.
When looking to trade overextended oscillationsm, a few things
need to be kept in mind:
1) Respect the trend. Short trades are going against the trend
as of now. They can be lucrative, but you need to play them a bit more
conservatively than if you had the trend in your direction. (Buying an oversold
uptrend or shorting an overbought downtrend are more reliable and potentially
lucrative.) Therefore, play a little lighter and don’t overstay your welcome.
Take your profits a little quicker than you would if the market was already in
an established downtrend.
2) Exact timing of your entry is difficult, if not impossible.
There are two ways to deal with this. You can either use reversal signals in
lower time frames to time your entries, or you can utilize a plan of scaling in
as the trade moves against you. What you should not do is say, “Ok, we’re
overbought, time to load up on the short sideâ€. If you’re all-in immediately and
your timing is poor, you could be in for a scary ride.
Best of luck with your trading,
Rob
For those who may be looking to expand their
knowledge beyond just market timing, my
Hanna ETF Money Flow System utilizes the VIX in generating trading
signals for spread trades.
Rob Hanna is the principal of a money
management firm located in Massachusetts. He has spent the last several years
developing and refining methods for trading in stocks across multiple time
frames. He selects stocks using both fundamental and technical criteria, and
then trades them using technical analysis techniques.