In the last few weeks we have seen many indicators flashing the same warning, a trend reversal or sharp sell off is imminent. Of course this does not mean the sell off will happen now or tomorrow, sometimes and in particular during a mania, the expected sell off can take longer to materialise. I know because I have already seen it, for example take a look at the S&P 500 in September last year.
The S&P 500 rally during July-August 2020 was without interruption, similar to today's rally. The S&P 500 was in a mania and overbought but kept going up until...it dropped 10% suddenly. Look at the RSI at the bottom of the chart, it was overbought for two months prior to the sell off. Normally, in a normal situation the market corrects after the RSI is overbought. If the correction is deep the RSI can become oversold, then a new wave up starts. A similar situation is happening today, the momentum indicators have been overbought for a while yet the S&P is still rallying.
The more the market rallies the less upside there is, at the same time the downside is increasing. This means buying the indices at these levels does not offer a good risk/reward. If history is any guide, there will be a significant decline before the rally resumes. What you want is a good risk/reward trade with plenty of upside. We are waiting.
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