Now that we are in a holding pattern awaiting the FOMC announcement, I am working, and thinking about The Philosophy of Tops.
The first thing I did was go through a list of 113 sector indexes. I don't know if I have amnesia or something, but I have never seen anything like this. There might have been a handful of indices that were up in an orderly uptrend. The rest, at least 75% of the 113, have completely blown off to the upside, and are showing extreme ADX readings for the symbol on the daily charts. I saw quite a few potential spike tops, potential lower highs, and pennants that might not go in the expected up direction.
What does this tell me? First off, the indices that "should" be down are not. The ones that are supposed to be up are up so high that they not sustainable and probably need a correction on the weekly charts to get back in line.
The $KIX might be an extreme example but daily charts like this were everywhere in my survey. When you have a move up like this, short positions are repeatedly taken out as buyers pile in. This process builds a very weak technical picture, because short positions actually translate into bids on the way down since they have to buy back their positions in order to take profits.
When shorts have been repeatedly killed by Mad Cows -- formerly known as raging bulls -- as they stampede buying hand over fist, the supply and demand equation, particular in stocks, becomes so ridiculously lopsided that on the way down there are virtually no bids from short-covering, and hence the reason for pursuing Extreme ADX Reversal setups.
I will be the first to say that while it is extremely difficult to pinpoint a spike reversal to the day in order to buy that perfectly-timed put option, the fact is that for anyone who has their boat loaded with stocks, it perhaps best to do as Baron Rothschild -- "always sell too soon" -- since we started buying early in the game in February 2003.
If there is a reversal, it will catch everyone by surprise, and worse, there will be no room for things like "rotation" to relatively undervalued areas. Not even airlines.
I hope we all still remember what it was like to try to get off the ride on the wrong side of the big spike back in 2000. Again, the reason why so many people are caught at the top fully exposed is because tops don't look like tops, and no one will toll the bell for thee, except maybe me.
04.01.28 12:40 #