The stock market pullback bottomed out last Wednesday and subsequently we saw major indexes catapult back to new highs within days.
Bull markets have this habit of continuing longer and further than most traders expect. Those who bet against it are actually providing a good portion of the fuel that continues the uptrend longer than it otherwise would. Their short covering pushes prices higher and higher. Then they go short again at what looks like the next top.
Eventually there comes the point where they are exhausted and give up on trying to short the next rally. And of course, that’s when you actually do get a decent correction. Stock markets follow the path of max pain for investors.
Let’s have a look at the Nasdaq chart (click for larger image):
We got the dip we expected, but the bearish divergences we pointed out a few weeks ago remain on the charts.
We will be in lunar green period for the next couple of weeks, and this is a seasonally favorable period for stocks, so we can easily go a few % higher still.
Overhead resistance from long term trend line is around 4150 this week, leaving some room to rise.
But the ongoing bearish divergences make me very cautious at this point.
Notice how the Earl2 indicator has only made very weak peaks since July, and is now actually going below zero despite new Nasdaq highs.
I am going to stay mostly in cash until the technical picture improves.
I just updated our performance page after what will be the last full lunar period for 2013. The moon cycles have done well this year.
The Nasdaq gained 777 points in our lunar green periods, versus a gain of 309 points in the red periods.
So, the green periods have handsomely outperformed the red periods.
Going long in the green periods only, the basic lunar strategy, has ended 2013 with a 51% risk adjusted annualized return. Not bad.