The Stock Market Holiday Bulge -- Prepare for Selling

By Chris Vermeulen  DEC 31, 2013 10:45 AM

With the stock market still firmly in an uptrend and firing on all cylinders, short-term analysis is pointing to a pause or pullback in the next week or two.

 


2013 has been a great year for trading, and my 2014 forecast looks to be as good, if not even better. I do have something exciting to share with you that is going to make 2014 really amazing, but first let me talk about the stock market and what is likely to unfold in the next week or two so you can protect your investments.

Below I have posted two charts on sentiment, courtesy of StockTwits, to show where the US stock market is trading. The first chart is of the symbol $STUDY, and this sentiment shows us that 98% of trading material is bullish on the stock market right now. My theory is, if everyone is moving in one direction, you had better be ready for them to change direction any time. The masses move like a school of fish, and once they get spooked, they change direction and start selling everything they just bought.

The second sentiment chart is of the SPDR S&P 500 ETF (NYSEARCA:SPY). This mimics the S&P 500 Index (INDEXSP:.INX) and is also a gauge for broad market sentiment. If we think back to the 80/20 rule, we know that 20% of the crowd/clients are correct while 80% tend to be incorrect. With sentiment reaching the highest level in a couple months and with the index making new highs, coupled with the holiday price bulge (holiday rally), logic says a pullback in the near term is very likely and that it could be sharp.

Market Sentiment – Broad Market Contrarians Indicator

sentiment

The stock market has wave-like patterns that form on a monthly basis and provide us with a steady stream of trading opportunities. One of the best swing-trading tools for timing these waves is through the use of this chart below provided by Barchart.com.

The chart is self-explanatory, but let me quickly explain how it works. This chart rises as more and more stocks trade above the 20-day moving average. And when the majority of stocks are in a strong uptrend, it’s a lot like humans all trading in the same direction (a school of fish), and the odds favor a change in direction temporarily. These waves are great intermediate trends for swing trading and typically last multiple weeks at a time. Keep in mind, it's not as easy as it looks, because there are more moving parts to this equation, but you can see these extreme waves clearly in this chart.

20dma
 
Conclusion

With the stock market still firmly in an uptrend and firing on all cylinders, short-term analysis is pointing to a pause or pullback in the next week or two. I did forecast this exact price action several weeks ago and discussed how it could lead to the start of a major market top. If a major top does form early in 2014, then we could make some big money once the downtrend starts.

Remember, stocks fall three to seven times faster than they rise, so once we get short, massive gains can be made quickly, and while the masses (school of fish) are losing money, we should be on the other side watching our trading accounts skyrocket!

Editor's Note: Chris Vermeulen offers more content at his sites, TheGoldAndOilGuy.com and Traders Video Playbook.
No positions in stocks mentioned.

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