Markets at Short-Term Top
Markets don’t go straight up and they don’t go straight down. There are nuances to this, but suffice to say equity markets have put in a short-term top. The obvious thing most traders that missed the exit is, “what do I do now?” My answer is usually a combination of, have patience and wait for the dust to settle. We need to assess what is showing weakness and what is showing strength. It would be prudent to map out your plan. Consider a few things before doing anything.
Investors that have not positioned in the market, were waiting for a pullback. That will be new money coming into the market. If you are in this category, good for you, this dip will establish your floor or risk level going forward. Extremes in fear indicators are pointing to a potential dead cat bounce.
Fund managers will be rotating into the strongest sectors. Watch for the money flow and note which sectors are showing relative strength.
Visualize and map out the likely scenarios that the market will take in the short-term. Using SPY as a reference, we discussed 274.00 as a potential bounce zone in the weekend video newsletter. Pre-market shows SPY at this level.
We are visualizing a pivot low at 274.00 and a potential descending pattern. This bounce would occur at Fibonacci confluence.
Stochastic is in the green zone, but RSI and MACD show bears still have the momentum. TICK cumulative is flat, most likely showing either rotation or a combination of rotation and distribution.
An alternate scenario is for SPY to pause then test the 50ma. A test of 270 (+/-) would be 5% pullback. (-5.50% +/-). A pullback here would likely be a high probability bounce and an area where investors waiting for this test of the 50ma to pile into the market, at least partially.
Markets at Short-Term Top Confirmed by VIX VXV
VIX VXV ratio is a very reliable indicator for identifying short-term tops. While it is not a guarantee, previous occurrences point to a bounce in the coming days. With NYMO and NAMO at extremes, the probability is greater.
SPX in the lower panel, also identifies an extended trendline merging at the 50ma. My guess is we bounce soon.
Watch List – Relative Strength Candidates
We are in no hurry to take on new positions, until we see confirmation. The latter will occur if the markets bounce and these candidates respond accordingly with a follow-through day.
Notes are in the commentary section. Trade of the Day setups are the only way we will enter any new positions and only after the market settles down. We will wait for the Opening Range.
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