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Don't Short the Stock Market... Not Yet AnywayBy Jeff ClarkFriday, January 5, 2007 In the final hours of Wednesday's market, willing stock buyers stepped up to the plate… that means it’s still too early for us to get aggressively short.
The stock market gapped over 100 points higher Wednesday morning, and we were looking at a new all-time high for the Dow Industrial Average.
But the buying panic calmed down on the release of minutes from the Federal Open Market Committee, and the market actually went 50 points into the red. By the end of the day, though, bulls regained control, and we ended the first trading day of 2007 on a positive note.
Nonetheless, we have sell signals on several of my favorite technical indicators…
• The Nasdaq Summation Index (NASI) is heading lower.
• The Nasdaq Composite Bullish Percent Index (BPCOMPQ) has crossed below its 20-day exponential moving average.
• The Volatility Index (VIX) has broken out to the upside of a falling-wedge pattern and is headed higher.
• Semiconductor stocks – which typically lead the market – are vastly underperforming the major indices.
• Investor sentiment is overwhelmingly bullish.
I could go on and on, but you get the idea – the stock market is extremely vulnerable to a sharp correction… and I believe we’ll get an opportunity to make a lot of money on the fall. But as long as buyers keep showing up on every dip, betting on a market decline is a losing proposition.
It’s not as though the bulls are cleaning up, either. Despite all the hoopla over the Dow Industrial Average reaching new highs, the S&P 500 and Nasdaq Composite are pretty much at the same levels as a month ago.
Indeed, buyers of index calls and index puts have nothing but losses to show for their troubles.
So we wait. Like children waiting for their parents to wake up on Christmas morning, we wait for the market to tell us its okay pull the gifts out from under the tree. As a trader, it’s difficult to be patient in this environment. But we’re looking to trade index puts, so patience is the best trait to have.
The market usually rallies during the first week of the year. But those gains are just as often given up by the middle of the month. So a little bit of restraint this week might give us our opportunity by Monday.
Best regards and good trading,
Jeff Clark
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