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business newsTen Warning Signs of a Major Top
By
Ron Coby
Apr 12, 2010 8:50 am
This next ride down could be the wildest since the top in 2007.
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1. Rising oil and gold prices are pressuring bonds and pushing interest rates higher. This could spell trouble for both the economy and the stock market.
2. The Weekly Full Stochastic is topping, warning that prices are high and could reverse at any time.
3. Like 2007, the weekly MACD is curling over from extreme overbought levels.
4. The S&P 500 is fast approaching its declining 200-week moving averages (1225) as well as the 0.618 Fibonacci retracement (1227) of the entire collapse.
5. Cash is at the lowest levels since 1987 and 2007 at 3.5%. This means mutual funds are all in and they will have little ammunition to support the next series of dips or severe market correction.
6. Recent sentiment surveys are showing that bears are becoming an extinct breed on Wall Street. Investors Intelligence showed only 20% bears last week. The bulls are certainly running wild on Wall Street.
7. The Volatility Index is at the very low and dangerous level of 16.78 now and is warning that investor complacency is very high. A low VIX isn't a good timing indicator but simply another warning sign that a significant top could be approaching. We're now at the exact same VIX reading that we had in early October 2007, right at the top.
8. The Dow Jones Industrial Average is forming a possible right shoulder on the monthly chart. This could be the mother of all head-and-shoulder tops. Giant head-and-shoulder tops are also forming in the Russell 2000, the Wilshire 5000, and other global markets on the monthly charts. These are textbook head-and-shoulder tops if completed.9. The market leading index, NASDAQ, is now at the exact same RSI reading as in early October 2007 of 74.42. The RSI then went to an extreme low reading of 21.95 on the daily chart in October of 2008 and 29.79 at the March 2009 lows. The RSI can go a lot higher and you only have to look at the 86.74 RSI reading in early 2000 for evidence of that. However, this is a high and potentially dangerous level on the RSI just like it was in October of 2007.
10. And finally, the old Wall Street saying may hold up well given all these early warning signs: “Sell in May and go away”.
In summary, there are many additional warning signs of a imminent top. High oil prices have historically led to recessions so prepare for the possibility of a double dip. When the Fed is forced by the bond market to hike short-term rates, tighten up the chin strap on your crash helmet. Put on all your other crash protection gear as stocks will reverse violently once the Fed starts jacking up interest rates. Get ready to hedge your long positions as the roller coaster approaches another peak. This next ride down could be the wildest ride since the one from the top in 2007.
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No positions in stocks mentioned.
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