On my last blog, I mentioned that we are seeing some very obvious rotation out of market leaders (high beta) into the defensive areas. Take a look at today’s chart and note the diverging Chalkin Moneyflow in the tope pane (which is a fast moneyflow indicator), the slower moving moneyflow indicator at the bottom of the chart (Accumulation/Distribution), and the diverging momentum oscillators (RSI, MACD, Stochastics). Divergences are happening left, right and center while the broad S&P500 index has made new highs. I also note the test of the top of the current trend channel – another sell signal, albeit more of a near-termed trading signal.
We raised a bit more cash this week by taking profits on more of our higher beta positions. We’re around 22% cash in our equity model at this time.
Please be aware: Selloffs rarely happen in a straight line – they need to form what some call a “bull trap”—which basically catches the masses who are used to buying every dip. Expect a rally very soon – it looks like one may have already started. But then, when everyone relaxes, the real correction should start. This type of action typically forms the complex topping patterns that technical analysts assign fancy names to (double tops, triple tops, head & shoulders, rounded tops, etc). I would suggest that readers of this blog consider holding back on buying too much in the current dip. Sometimes, as Donald Trump notes, the best investments are those you don’t make.
By the way, it remains my conviction that any meaningful (10-20%) correction we see over the coming weeks or months will be a buying opportunity within a greater secular bull market cycle. Please do not take the above words of caution as some sort of prognosis of a major bear market – I view any corrective action over the coming weeks or months as a counter-trend move within the broader bull market scenario.
Keith on BNN television MarketCall: Tuesday April 15th, 6:00pm EST. Phone in with your questions on technical analysis during the show. CALL TOLL-FREE 1-855-326-6266. Or email your questions ahead of time (specify they are for Keith) to [email protected]
The sell when the snow goes is really working so far this year. But after today’s close we look extended to the downside, at least on the shorter term
Good to hear from you again Dave
Keith, in your writings, you have said that you like to wait three days after a stock breaks out to buy. What about a sell? It seems to me that sometimes three days could cost considerable money. What do you recommend on downside breakout?
Really good question Fred–and you are 100% accurate in your observation that things fall faster than they climb, so reaction time can be crutial. Depending on the nature of the breakdown, I will sometimes either react right away–or wait several days before pulling the trigger. Eg–if the stock just broke a trendline, but no really bad news is happening, I will do the 3-day wait. If its bad news, usually the stock will plummet that day, and even the following day as more retail inventors react. I may try to sell in the opening hour of the first day before the real kicking starts. Following those first 2 days, you will see the ‘dead cat bounce” usually within a week or so–I will try to catch that if I couldn’t react fast enough on the initial selloff.
You have to play it by ear with selling. The 3 day rule is a guideline that makes you pause and think about the nature of WHY you are selling – and that is important, but you have to be flexible to the individual reason for a chart break, and react accordingly. Its sometimes just my experience and spider-sense that tells me what to do–although that’s not always right either! Its an inexact science.