Why trading could be tricky this week

Last week I suggested the likelihood that the market was transitioning from an
uptrend to an oscillating market. A tool I used to discuss this was the 14-day
RSI reading in the S&P 500. Today, the RSI moved slightly lower. This makes the
bearish divergence that appeared likely now official.

In Wednesday’s column I suggested that a short index trade may be worthwhile on
a gap up or move higher Thursday morning since the S&P had become quite
extended. I took a small position on Thursday and have been holding it since.
The sideways market action over the last few days has allowed the overbought
condition to partially alleviate itself. (Although the SPY has managed to close
higher 7-days in a row now.) The edge that was apparent Thursday morning is now
diminished. Nimbleness when trading against the trend is important. I anticipate
exiting this position tomorrow whether it follows through or not. I will then
look for another entry when I feel the market has once again become overly
stretched.

Although I don’t put too much stock in seasonality, traders should be aware that
the period around the Thanksgiving holiday tends to be one of the most
consistently positive. This makes holding onto a short position Wednesday and
Friday especially dangerous. Should the market manage to move up further this
week and we see seasonality and trend win out over somewhat overbought
conditions, then Monday could offer another opportunity to try a
overbought-short entry. The major news over the Thanksgiving weekend will be
retail sales. If the market moves higher this week, and then retail sales come
out good, we could see a gap up Monday morning. This gap up should be short-able
— although I’m getting a bit ahead of myself right now. Anticipating
opportunities is much less important than recognizing them when they arrive.
However the market stretches in the next few weeks, up or down, I will be
looking to play the oscillations.

Best of luck with your trading,

Rob