Can 75% Of All People Be Wrong This Time?
Looking to the indices, on Wednesday, the Nasdaq opened
weaker and initially continued lower but found its low fairly quickly. It then
rallied throughout most of the day before giving back some gains going into the
close. Although it did close well (in the top part of its range), it was unable
to hold in the plus column.
The S&P put in similar performance but was able to hold
on to its gains. This action puts it at multi-year highs.
So what do we do? The market continues to
behave like a bull market–lower in the morning and higher in the afternoon.
This action suggests that traders/investors are willing to “take ’em
home.” However, the sustained overbought condition combined with the lowest
VIX in over 8-years is concerning. More importantly is the fact that the VIX is
now 10% below its 10-day moving average. Historically, after this occurs, 60-70% of the time there
is a correction within the next 3-to-7 days. Also, on Tuesday there was a TRIN
Reversal Sell signal. Usually, after this occurs, there is a 60-65% chance of a correction over the
next 3-7 days. Of course, this time may be different. It’s possible that we could get a “rolling”
correction where some sectors correct while the rest of the market continues to
forge ahead (the semis were a good example of this on Wednesday, could telecom
be next?). Of course, as
you know, in the market, anything’s possible. All things considered though,
I think you can’t ignore
the statistics.*
Based on the above, you might want to stick with
sectors that have recently pulled back or avoid new trades altogether. On the
short side, continue to look for shorting opportunities in the index shares but only if you
are a) aggressive (I may have to add the word crazy here if they keep going up) or b) looking to hedge existing long positions. And finally,
don’t fight the tape just because it is overbought–wait for signs of weakness.
No setups tonight.
Best of luck with your trading on Thursday!
Dave Landry
*I know, “Statistics are
worthless, 75% of all people know that.” (Homer Simpson)
P.S. Reminder: Protective stops on every trade!
P.P.S.
In February I’m having a small, exclusive three-day swing trading seminar and I would like you to attend.
Click
here.