Why You Should Not Buy
Looking to the indices, on Tuesday, the Nasdaq traded back
and forth in early trading but soon began to sell off. It found its low by
mid-day and essentially worked its way higher throughout the rest of the day.
This action (yet again) has it closing at multi-year highs.
The S&P also reversed after selling off but was unable
to make it back to the plus column.
So what do we do? Nothing much has
changed. The VIX remains near multi-year lows and somewhat stretched away
from its 10-day moving average (this suggests complacency). Further, the market
remains overbought. In fact, tonight (Tuesday), I have a TRIN Reversal Sell
Signal (email me if you need the rules). This system, based on historical
backtesting, suggests that there is a 60-65% chance of a correction over the
next 3-7 days. Combine the above with overbought action in most individual
sectors and one has to argue that initiating new positions (longs) at this
juncture is dangerous at best. Therefore, on the long side, stick with
sectors that have recently pulled back or avoid new trades altogether. On the
short side, look for shorting opportunities in the index shares but only if you
are a) aggressive 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 Wednesday!
Dave Landry
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.