By The Disciplined Trader
The markets continued to rally as I had anticipated last week and my limit sell order lay waiting for what I thought would be an inevitable trade at 1511. Only it remained unfilled as the S&P 500 topped at just half a point shy and then began its descent.
The pullback has alleviated the market’s overbought condition to a degree and my RSI trading signal is no longer screaming ‘sell’! So I pulled my short order and remain on the sidelinesfeeling unsure about whether a tradeable decline has begun and aware of the potential for further upside from here.
In my experience and given the strength of the rally in January, I believe that there will be another leg up. The RSI has just hit one of the highest levels in 17 years, confirming the bullish market momentum and underlying strength. In RSI history this high is unusual and the extreme bullish market sentiment should not be brushed aside as a contrarian indicator yet.
I’ve learnt that extreme sentiment like this does fuel further rallies, often to new highs and without any meaningful corrections becoming a path of frustration for the bears. With this is mind I’m watching for new highs on the index to be met with negative divergence on the RSI. This is when the RSI indicator does not make a new high as well and bearish divergence is confirmed.
I believe this divergence will mark an end to the rally. I have therefore raised my limit sell order to 1514. I’m expecting a push to the long term trendline at 1517. My stop loss is 1550 with a target of 1460.
The Disciplined Trader is an average guy who has little fundamental knowledge of the financial markets, yet he consistently makes money trading. He simply applies the basic rules of trading discussed in bettertrader.co.uk and executes his trading techniques applying great discipline.