I like the image of storm clouds on the horizon. The image reminds me that the market is always in a constant state of cycling. Lows are followed by highs. Highs are followed by lows. If the trend is up, then the lows are higher over time and the highs are higher. These conditions are good times to be invested in the C Fund (a proxy for a diversified portfolio of stocks).
In my previous post on the weekly market, I gave directions on how to use stockcharts.com to view the market. Repeat those instructions but, this time, leave the daily button (beside the blue update button) set on "daily."
The daily chart shows clear storm clouds on the horizon. These are the signs:
1. The RSI indicator at the very top of the chart is showing 70.37. This shows that the market is overbought. Remember that the market cycles from high to low and back again. We are now in high level territory. A high reading doesn't mean the market will drop tomorrow. It means that you should take note that prices are relatively high compared to past price action. In my experience, the time to sell happens when there is a "negative divergence" between the RSI reading and the price on the S&P. In other words, the S&P keeps going higher while the RSI reading goes lower. That is your sell signal! That is your signal to move 100% into the G Fund. We are not there yet.
2. The green line on the chart reflects the 13-day moving average of prices on the S&P 500 Index. Notice how the green line has provided support to prices since the second trading day in September. This is Bullish action. You want to see the 13-day moving average support rising prices. This means your C Fund will go up in value as well.
What about signs of storm clouds on the horizon?
3. Perhaps, the most unmistakable sign of storm clouds ahead would be the blue bars in the MACD chart. This chart is below the chart of the S&P 500 Index. Usually, the blue bars go up as the market goes up. Sometimes, the market keeps going up and the blue bars flatline. The blue bars die. This divergence is a sign that things are not right. Even though prices are rising, the price rise is false. It is false because it is not supported by rising blue bars or the MACD histogram.
Look at the blue bars carefully. See how they have flatlined since the beginning of October. To me, this flatlining means the rising market is living on borrowed time. So, I key in on resistance levels. Where are investors and traders likely to sell to try and get out even? As we know, those levels are probably around the open gap @ 1205. 1196 is another good possibility.
Conclusion.
We are enjoying the rise in prices for now. We are also aware that all good things come to an end at some point. We remain on the lookout for a third red flag. We are prepared to leave the C Fund if the market closes the gap @ 1205, or, simply hits the 200-day moving average @ 1196. As the famous trader Jesse Livermore suggested, we are being more fearful while the general public is becoming more greedy.
I use a pattern to ferret out turbulence ahead. Notice that on the second trading day in October, the market dipped below the 13-day moving average. I consider this to be red flag number 1. The market will probably keep going higher and that is cool. What I now do is look for a second red flag or instance where the market drops below the 13-day moving average. When this happens, I will consider the event to be red flag number 2. This means that we are approaching the event horizon. I would now be extra cautious. When the market dips below the 13-day moving average or green line for the third time, the market has flashed red flag number 3. Its time to go. Its time to step aside and see what develops next. If the three red flag system keeps me out of a rising market (February to April 2010), I don't stress because the market will eventually drop and I can simply get back into the C Fund at lower prices.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
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