Don’t get over extended
Despite the fact that it is September…despite the fact that it
is a mid-term election year…despite the fact that the housing market looks to be
shaky…despite the fact that the economy is slowing…despite the fact that there
are signs of inflation…despite the fact that there is an inverted yield
curve…despite the fact that new highs were slow to expand…the market keeps
rising. The rally over the last two months, and especially since mid-August, has
been impressive. The S&P is approaching its May highs. The NASDAQ has a way to
go but has begun to exert some leadership recently. So the question is, will all
those issues that I mentioned above manage to turn the market lower, or can it
break out and rally significantly higher from here?
I’m still of the opinion that the market is likely to undergo a selloff in the
near term. Recent action has that selloff starting at higher and higher levels.
The rally of the last two days may very well be options-related, and once that
is resolved the move lower may begin. Of course there is still the matter of CPI
and the upcoming Fed meeting. We all know these can be market moving events as
well. Timing the exact top is very difficult, to say the least, but I believe
we’ll see one of some consequence sometime in the next week.
That doesn’t mean I’m aggressively shorting. I’m just skeptical. As always, I
strive to take the trades that meet my criteria. Lately, there have been
significantly more longs than shorts. The action in many of these longs is not
what one would hope for, which has helped to further my skepticism.
New longs from this point should be taken with increased caution. The market is
becoming extended and nearing resistance. Note the
(
QQQQ |
Quote |
Chart |
News |
PowerRating) for instance are
trading outside of their Bollinger bands while the 14-day RSI is approaching 70
— a level not seen since January 11th. It is also just under its 200-day moving
average of $40.09 and the $40 level which has a significant number of options
ready to expire on Friday. A push through these levels is certainly possible,
but will it be sustainable? I doubt it. Don’t get over extended on your longs
just yet.
Good 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.