Markets in a Broad Upside Reversal
This has been an exciting week for traders as the equities market was on the verge of a major selloff. Fortunately, we saw sentiment and market internals shift shortly after a new low was set last week. That was an early warning for us that a trend reversal to the upside could happen at any hour or day this week.
The rallies Wednesday and Thursday were on solid volume and the market's internal indicators and market breadth also were strong. There has been a large surge of new highs across the board on the
New York Stock Exchange
,
Nasdaq
, and the American Stock Exchange. These numbers tell me it's not just one sector moving the market, instead it's a broad market advance led by institutional buying.
While I don't typically try to pick major tops or bottoms because of the added risks and lower probability of winning trades, I do tend to spot them forming a few days in advance allowing me to tighten stops and take some profits on positions.
Trend reversals typically have large violent moves near the beginning and end of their life cycles making things not only tougher to trade but potentially more costly. Once I see a trend confirmed with moving averages, volume, and sentiment along with market breadth that's when I start looking to take positions on pauses or pullbacks to support zones. This greatly increases the odds of winning or making money from the market.
SPDR S&P 500 Trust Daily Chart
As you can see, the market clearly has broken to the upside above key moving averages after finding support at the 50-day moving average. This rally has some solid volume behind it which I also like to see.
The first three to four days of a trend reversal generally post some big moves but after that initial thrust expect a pause or pullback to happen.
SPDR S&P 500 Trust 60-Minute Intraday Chart
We were lucky enough to take profits on our inverse S&P 500 trade as the market started to give us mixed signals of a possible rally. A couple of days later -- on Nov 26 -- we saw a major shift within the market sentiment preventing us from shorting the market again.
Two days later, the broad market gapped higher triggering protective stops and short-covering sparking a fierce two-day rally which took the market up to a major resistance level.
I do feel as though the market is going higher, but right now, everything is way overbought and trading at resistance. Even if the market moves higher for another two to three days and breaks this resistance level, it will most likely have a pause or pullback as it regains energy for another thrust higher.
In short, it looks as though the trend is now up and the Christmas rally could be gearing up to be a good one.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.
Chris Vermeulen is founder of the popular trading sites www.thegoldandoilguy.com and www.ActiveTradingPartners.com. There he shares his highly successful, low-risk trading method. Since 2001, Chris has been a leader in teaching others to skillfully trade in gold, silver, oil and stocks in both bull and bear markets.