Only in a short term trader’s world can one be feeling like the markets are reading to move higher on one day and the very next be cashing out of his positions for fear that the market is ready to sell off. At the close on Wednesday I commented that I got a buy signal on the Dow thinking we could go up from there. I just didn’t expect to get all of the move in one day causing me to cash out of my stocks, take my gains, and go into the weekend without worrying about what the professionals will do when the come back from holidays next week.
I certainly didn’t expect a near 300 point rally on what was really below average volume, but I wasn’t going to miss the opportunity to take my profits. A small pullback would have been more constructive setting up a potential rally next week, but the market doesn’t always do what makes sense. I used to take the markets a week or more to move 300 points, so it’s important not to become immune to these big swings and let profits slip through our fingers.
To recap, I took my gains in gold and silver which I’ve been bullish on for weeks now as I feel metals could pullback and consolidate. I also sold my long equities in the Dow and Nasdaq as I think the chances favor a small pullback given how high we’ve come on lighter volume. The following charts will make my case as to why I think we’re slightly overbought here.
After today’s rally I can’t ignore the facts. We are historically overbought here and entering new longs at these levels can be very dangerous. If this market has taught us anything it’s that market’s go up and they go down, so there will be plenty of chances to get long in the coming weeks should this rally have legs.
There’s a few things going on in this chart I want to bring to your attention.
- RSI is closing in on the upper boundary of a symmetrical triangle.
- Stochastic nearing very overbought levels.
- Price action is approaching it’s upper boundary trendline indicated by the white arrow.
- The red boxes show 2 separate time-frames when this indicator rallied a significant amount. The first back in 06 was nearly 1651 points which is a large amount for this indicator in one big move. Right now this current move totals 1408 points from the bottom to Friday’s close and it did it in a much shorter time frame. Such powerful rallies are difficult to sustain and are proned to give back some of those gains. We may have one more burst left, possibly a gap up on Monday, but I suspect many sellers will be lurking if that occurs. I wanted to be in cash so I wasn’t distracted with positions and therefore trade from a more carefree state.