An Interesting Read from the Good Technician - Jeff Clark

The Market Is Waving a Caution Flag
By Jeff Clark
Tuesday, February 28, 2012
History repeats itself in the stock market. The S&P 500 is doing the same thing today that it did in 2011. And that's a bad sign for the short term.

Stocks have started the year in "rally mode." The S&P 500 is up 8% so far this year. And despite numerous technical indicators flashing warning signs, the momentum just keeps powering stock prices higher.

We saw the same action last year. You can go look at my Growth Stock Wire essays from last February to see what I'm talking about. There were caution signs everywhere… But the market just ignored them – for a while, at least…

Everything I wrote back then leaned bearish. A correction was coming. Stocks were set up for a quick, hard decline. Anyone with too much exposure to the stock market was going to feel the pain.

Day after day, stocks would continue to float higher. And day after day, I would pound my forehead on my desk and wonder why all my proven technical indicators that had worked so well before seemed to have lost their magic.

Then… during the first two weeks of March, the S&P 500 lost 8%. Stocks gave up all their gains for the year… and the S&P 500 traded right back down to where it started in January.

I was reminded of this yesterday when I looked in the mirror and noticed a bruise forming on my forehead. A few hours earlier, I had pounded my forehead on my desk as the S&P 500 defied gravity and made another new high for the year… despite multiple warning signs from the Volatility Index, Summation Indexes, sentiment indicators, and many other technical indicators.

Just about every indicator I follow is waving the "caution" flag. Yet price action is undeniably bullish.

For a trader, there really isn't anything to do here. This is one of those times where the sidelines look like the most comfortable place to be. Stocks are far too extended and there's just too much risk to be overly exposed to the long side of the stock market. But the momentum and price action are too strong to justify aggressive short positions.

The best strategy is to wait for the market to play out the same script from last year. A 5%-8% decline will be enough to relieve most of the overbought conditions and eliminate the "warning" signs on most of the technical indicators. And it'll set the stage for a late spring-time rally to new yearly highs on the major stock indexes… Just like what happened last year.

Best regards and good trading,

Jeff Clark

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