For the second week in a row the S&P500 comes into a new trading week at its best level in 5 years. With a nice break of 1,475 the most likely move is for a test of resistance at 1,500. However, below 1,470 and I’ll be in the camp that we just put in top that I would expect to last at least 30-90 days. The last week or so has seen a lot of bullish signals, and this is a true test of a technical trader, which I consider myself to be. While I am a believer in the strength behind these signals in the intermediate term, I consider them good short term sell signals.
My argument is one based solely on psychology. I like to put myself in the mind of the “smartest” trader in the world when making these calls. By that I don’t mean by any stretch that I am the smartest, I simply try to ask myself, “What is the smartest trader in the world thinking right now?” In my view, that trader is seeing all of the bullish signals right now, especially technical and taking a contrarian approach.
We’ve got the Midcap 1000, Russel 2000, XLY and Dow Jones Transportation Index at all time highs. The Dow Jones Industrial Average and S&p500 are at 5 year highs. Banks and technology are near those same 5 year highs but to me it seems like the bulls are just starting to assume that those two sectors will follow suit, and that could prove to be costly. Big bank earnings came and went without the sector as a whole (as measured by XLF) moving above $17.20 resistance. This week, we’ll get tech earnings from AAPL & GOOG which will go a long way in determining if QQQ makes up the 4-5% it needs in order to move above its 2012 highs.
Speaking of AAPL & GOOG, both of those stocks have traded very poorly and are both actually in the red for the year. This to me is a sign that regardless of earnings, these two stocks are likely to be in sideways or downward trends for the foreseeable future. That means, tech stocks like FB, AMZN, & CRM will need to continue their recent bullish momentum in order to make up the difference and I’m not so sure that will happen.
Bottom line, while there are a lot of bullish signals right now that is often when there is the most liquidity to sell into. The smartest trader is often the one with the largest portfolio, and in order to take profits on large positions those traders need liquidity. They are starting to get it with this voyage to new highs. Yet with the lagging action taking place in XLF & QQQ, it could be that this move to new highs is actually being slowly sold into by those “selling on the way up.” The resulting action would mean that when volume does increase meaningfully, it is likely to be the downside, as those who were not keen on taking profits into the rise rush to exit as they fear they are missing out on a 1-3 month top.
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