How Not to Chase a Runaway (and Overbought) Market
The market has had a terrific rally over the past two days. There is excitement building and there is certainly evidence that a new bull market is in the midst of occurring. After days like the past few days, the human urge is to “just buy anything” in order to be part of this.
In reality, if you are trading high probability set-ups, especially with ETFs, the last few days means you were taking your profits from your long positions bought last week when no one wanted stocks or long ETFs (remember, the market had dropped four consecutive weeks ending last Friday). This rally allowed for many positions accumulated to be exited at profits.
Now, going forward, with the market is so overbought, you wait until the edges are again back in your favor. The 2-period RSI of the S&P is above 98 and this means the market is short-term overbought. Yes it may go much higher as often happens in early bull market rallies. But waiting for it to pullback before entering is the smarter thing to do. The reasons are many and the main ones are that you want to stay disciplined in your approach (buy the pullbacks, sell into the strength) and you want to make sure that when you’re taking your trades, you have historical edges in your favor.
The lesson for today is this: let’s hope that the stock market goes higher over time. It’s good for everyone. But in our trading, we’ll wait for it to pull back to levels that have had strong historical edges.
Special Note – I’ll be conducting a free presentation on the TradingMarkets Swing Trading College, on Thursday, March 25th at 4:30 p.m. Eastern. If you’d like to attend then click here to reserve your spot .
Larry Connors is CEO and Founder of TradingMarkets.com and Connors Research.