How to Spot and Time Stock Market Tops: A Primer for Daredevils, Part 2
Market tops are typically not an event but rather a progression -- and they tend to take much longer than most investors expect.
On May 14 I wrote a special report on how to spot market tops just before they happen, and how to do it with a very high probability of success. I also explained the major pitfalls to be aware of so you stay on the right side of the market.That special report truly showed you what was going to happen a few weeks before it did. Much like how this report shows you what is likely to happen in June.
I look at the market with a "you are here"-type view, using cycles, volume, price patterns, and momentum to forecast what is likely to unfold in the coming weeks. Depending on the time frame used for my analysis I can figure out with a high probability where price will be in a few minutes, hours, or days.
Market Directory: You Are Here
Stock market tops are tough to trade and time. That is because there are so many things happening in the media and emotions running are running so wild that it's tough to get a grasp on what you should really be focusing on in order to keep a level-headed trade around it.
Market tops are typically not an event but rather a progression that takes much longer than most individuals expect. I still find myself jumping the gun at times and I know this and have been through this process hundreds of times in various investments. The human brain is a powerful tool but emotions can force you to override your rules/strategy regardless.
Stop Fighting! Bulls and Bears Are Both Correct at This Stage
It does not matter where you go to get your stock market news and reports, everyone is arguing their bullish or bearish case more than ever. There is a reason for this: The S&P 500 (INDEXSP:.INX), Dow Jones Industrial Average (INDEXDJX:.DJI), Russell 2000 (INDEXRUSSELL:RUT) and Nasdaq (INDEXNASDAQ:.IXIC) appear to be entering a cycle top. What does this mean? It means the uptrend is almost over from a technical analyst point of view, and those who have been bearish for a long time believe that this is the top.
Keeping it simple -- removing news, economic data, emotions and biases -- we are left with one thing: technical analysis. This is based on price alone, and that's important to remember because the only time you get paid for an investment is when price moves in your favor. Believe it or not price only has blips on the charts here and there; they are based on news, economic data etc. In the big picture, stock prices tend to lead economic data by several months, and in some cases, years.
So the big question is this: If price action is the only thing that pays you when trading, why bother worrying about all the other opinions and news? That stuff only adds to the confusion, and in most cases, gets you on the wrong side of the market.
In short, from a technical point of view, the S&P 500 remains in an uptrend. But according to technical analysis the upside momentum is starting to slow. If we get a few more down days then the trend will flip, but it has not yet happened.
When the trend does reverse down you must remember that 80% of the time price will bounce back up to test near the recent highs before truly rolling over and collapsing. Think of it like a zombie movie. Just when you think you killed one it comes back to life for one last scare before it's dead.
Just to touch on stock market bottoms so you don't get confused, stock market bottoms are a little different than tops, so they are traded differently. I will cover them when the time comes.
Editor's Note: Chris Vermeulen offers more content at his sites, TheGoldAndOilGuy.com and Traders Video Playbook.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter