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Run For The Hills?

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by Gavin in Blog, Market Updates
May 9, 2014 0 comments

Market internals are really concerning me right now. Momentum stocks have been crushed, yet the Dow and S&P 500 are hovering near their highs.  RUT and NDX, indexes that you would hope to lead a healthy market are languishing, down 8% and 5% respectively.  Margin debt is at hugely elevated levels and earnings have been less than stellar. Is it time to run for the hills?

Robert Shiller think so as you can read here.

The New York Times thinks stocks aren’t wildly overvalued, but would need a lot of things to go right to see much more gains from here.

There is a lot of talk about margin debt at the moment, and it certainly is elevated. The similarities with past crashes are hard to ignore, but it still does not necessarily mean the markets are going to roll over tomorrow.  There were some great charts posted on Advisor Perspectives this week which I have pasted below. You can read the full article here.

margin debt

margin debt2

margin debt 3

margin debt 4

The other concern, as reported by Kimble Charting Solutions is that “Only twice in 35-years has the NYSE Index been at all-time highs, when the Russell 2000 broke below its 200MA line. Those two times were in 1999 & 2007.”

nysehighsrussell

Here are a couple of charts that I’m looking at right now:

RUT DAILY

Clear downtrend with strong support at 1075. The 200 EMA around 1104 is a crucial level as is 1145 which is the declining 50 EMA and the top of the trend channel.

RUT Daily

RUT MONTHLY

Not a great looking chart for the bulls. The similarities to August 2011 are obvious, stochastics are very overbought and starting to roll over. I would hold off on getting aggressively long until stochastics drops down to the 20-30 level.

RUT Monthly

TRANSPORTS

The transportation sector is failing to confirm the new highs the Dow Jones is making which is a bearish signal according to Dow Theory. Chart shows a wedge pattern with heavy volume at the upper border. Keep an eye on this pattern as a breakout could indicate the future direction of the broader market.

Transports

There is definitely cause for concern in the market right now, but there is no need to get outright bearish ….yet. The next big move is lower, it’s just a question of when and how far. We may see a bounce in the interim before the real selling begins.

Now is a time to be conservative with positions sizing and risk management. Patience is one of the hardest things in the market, but it is definitely a time for it. Trading opportunities will come, mark my words. Stay cautious my friends.

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Options Trading 101 - The Ultimate Beginners Guide To Options

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