A look at the charts shows that stocks and precious metals are headed for an imminent correction.

Last week I wrote how the markets looked very similar to the way they were at their January peak, from where prices dropped nearly 10%. And as I expected, we did get the first sign of toppy market in the form of last Friday's sharp selloff.

Today, we are now that much closer to a 3-8% drop, which is shown in the charts below. It's important to remember that bottoms tend to happen quickly while a market tops happen gradually. This is why so many investors take big losses trying to tip a top.

The market will continue to move up even when it is very overbought. It's only when extreme levels are reached that investors should try to play tops.

The VIX: Fear or Complacency

Although the VIX is not something I follow on a daily basis, investors should keep an eye on it. When extreme low levels are reached we know the market is feeling confident and buying up everything they can get their hands on.

I like to trade with the trend, but when extreme levels are reached I start looking for a low-risk setup to the short side using leveraged ETFs.

As you can see from the chart of the VIX and S&P 500 above, each time the VIX tested the support level the market made a top. Again the VIX is not a great timing tool, but it helps me decide which trading strategy I should use (swing trading or daytrading) and whether I should be looking to buy or selling the market.

NYSE New Highs-Lows Index

If a chart is worth a thousand words then this chart is worth 2,000. It cannot get any simpler that the NYSE new high-low index.

The green line is the S&P 500 index. The red line is the number of stocks on the NYSE that have reached a new high.

How strong is the market if is keeps going up while the underlying stocks are getting weaker? Something has to give.

Dow Jones Industrial Average - Daily Trend Chart

This chart adds another layer of clarity. You can see what happened last January when everyone was buying stocks, thinking life is good and trading is easy. As my trading buddy David Banister from ActiveTradingPartners.com always says, "Buy when they Cry, Sell when they Yell," and that's what I am looking to do.

On Wednesday (yesterday) the Russell 2000 index (small-cap stocks) sold down very hard. These stocks tend to lead the market both up and down. So the red flag is up, and I am just waiting for the market to show me its hand so we can catch the next big move.

Notes on Chart:
  • Market is overbought and in dire need of a pullback.
  • This steady rally has been much longer than a normal one.
  • The rate as which prices are rising is too steep to be maintained.
  • The market is trading at the parallel trend line.
  • VIX is telling us people are buying and not worrying about any possible drop.
  • NYSE divergence is screaming overbought.

GLD Gold Fund Trading

Gold is still in a major bull market, but the recent price action from December until now has been down as the precious metal has consolidated the big rally of 2009.

Looking at the chart above you can see the mini head-and-shoulders pattern. The neckline has now been broken, and prices are falling. I almost had a buy signal for gold two days ago with the small move up and the candle closing above the previous day's high. But because the price was still under the neckline (resistance), I decided to stand aside and live another day.

Midweek Gold Newsletter Conclusion

In short, the market may look very strong, but from a technical point of view it's about to die of exhaustion.

Gold, silver and oil should move together: sideways or down.

I am watching prices closely looking for a low-risk setup to play the coming decline. With any luck, we could make 10%-15% within a couple of days using a leveraged ETF.

If you would like to get my Real-Time ETF Trading Signals please check out my Web site at www.TheGoldAndOilGuy.com
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.

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