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Market Update: Shift Gears to Stay Ahead of Crowded Trades

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The transition that's needed right now is not easy, but it's what the market demands.

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One of the most difficult things to do as a trader/investor is to know when to shift gears. It's not like that '66 Ford Mustang where the shifting comes quite naturally. Shifting from a buy-the-dip bull leg higher to a range trade where you sell/short rallies and buy/cover on dips is not an easy transition, but it is one that has to be taken to stay ahead of the crowded trades.

The past few weeks I had suggested taking gains and waiting on the retrace. The retrace came and now the buyers are falling all over themselves to get back in but this reflex push back up appears to be just that, a reflexive reaction. It's kind of jumping back when your friend yells, "Boo!"

Here is a look at the S&P 500 (INDEXSP:.INX) charts intraday today.


Source: Stockcharts.com

You can see how this push higher is coming right back into an area where sellers will likely resurface. That will be the real test -- do buyers keep coming in at higher prices after the first decent spill of the year, or will they back off? Will the demand be there, or will Europe or sequestration or something other convenient new item provide enough doubt that buyers shy away? Right now it appears that they will take a break and some sort of choppy range should develop.

Note from the chart that the trend has transitioned now to sideways from bullish. That's not a bad thing because it resets the mean-time-to-failure (MTTF) clock, which was needed. A reset has to come sooner or later, and with the MTTF at 65% prior to the reset, sooner rather than later was part of the reason I kept calling for an expected retrace.

The downside target for this pullback is the retest and regenerate zone that exists back where trend transitioned to suspect bullish on the break of the $1474.50 area on the S&P. Since no retest has occurred yet, it is highly probable that it will happen before too much longer. If it doesn't then it becomes one of those statistical outliers that sometimes happens.

If the resistance zones do not contain this advance, then the range idea is bunk and this analysis will fail because an immediate test and potential break of the highs becomes much more probable as a result of that action. Having sold off shares and waited for the retrace to buy back in, I am beginning to short the indexes into this rise with the idea of trading a developing range for a few days to weeks. The ideal case is a further push lower, a retest of the breakout area that regenerates higher and leads us on the next leg up. That has a much greater probability of carrying farther and longer (in my opinion) that an immediate surge here. That's where the bulk of the adding should occur for traders/investors. Now we just need the market to provide that.

Twitter: @tatodayopportunity.
No positions in stocks mentioned.
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