LunaticTrader

Investing with the Moon

A time to stand aside

Posted by Danny on April 25, 2016

Stock markets keep marching higher as if pullbacks and corrections are a thing of the past. Can it keep going like this? Yes, it happened in 1995. Of course, that doesn’t mean it *will* keep going, but it is a viable outlier scenario. A reader was so good to pull up this old tweet I posted on February 18, with a buy signal for S&P 500 just a week after the bottom:

The market never looked back and S&P is now almost 10% higher and within a few % of new all time highs. Will it pull back here? Or just keep climbing like in 1994-95? I don’t know. Let’s have a look at the S&P chart:

^SP500 (Daily)  7_22_2014 - 4_22_2016

At the current rate of change the S&P is set to make new highs within the two weeks. A failure to do so would be a clear loss of momentum and show a break of the steep up trend that has been in place since the February lows. For many traders that would be a sign to take profits and that would give us a long awaited pullback. Within two weeks we will find out.
Technically there is a bearish divergence in the Earl indicator (blue line), which is just turning back down. The Earl2 (orange line) continues to head down and is nowhere near bottom territory. The MoM is still headed higher. A lunar green period will start on Tuesday, but this is not a favorable setup to enter new longs, so I will just stand aside and watch.
This is a point where the risk for a significant pullback is high while the upside potential is limited unless the market breaks out to new highs. Hence, we can stand aside and let the market prove us that it can go to new highs. Just letting other traders do the heavy lifting. If we get a pullback then a retest of the 2000 level is my base scenario.

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