Stocks Preparing for Pullback: Buy on Bad News, Sell on Good

NEW YORK (TheGoldAndOilGuy.com) -- The S&P 500 remains in a strong uptrend, but the index has posted a sizable gains for 2013 thus far so it's only logical that a pullback within this bull market takes place sooner than later.

With May now upon us -- and historically prices fall more times than not -- I feel a three- to four-week correction is on the verge of starting. Today we had very strong economic numbers confirming the economy is recovering. This news has sent stocks sharply higher as shorts cover their positions and investors who are not yet long get into position to profit from higher prices.

But the herd psychology and their trades are typically incorrect as they invest based on fear and greed. The old saying "buy on negative news and sell on positive news" will typically get you on the correct side of the market more times than not if used with price, volume and cycles.

The Technical Traders - S&P 500 Index Weekly Chart

If we look at the price of the S&P 500 we need it to break down below the recent pivot low before I become bearish.

Volume, which is not shown on this chart, is below average as price moves higher. This is a bearish sign, also.

Looking at a basic cycle using the stochastics indicator we can see that the current cycle is starting to turn down. Cycles tend to lead price during an uptrend, so we could still have stocks move higher for another week or so.

But be aware that when price starts to drop, it's likely a market top. But until then you must respect the uptrend. Stocks can remain overbought and toppy looking for months... so don't be gambling and trying to pick a top until we see breakdown start.

S&P 500 Stocks Trading Above 200 Moving Average - the Technical Traders View

Stocks trading above the 200-day moving average is a great indicator for helping spot broad market underlying strength/weakness. It does lag the market but is still very powerful. The chart below shows this info and my thinking of what is likely to unfold sooner than later though price may still rise for several days yet.

I also use a similar chart for timing swing trades and market tops that are based on stocks trading above the 20-day moving average. This chart is not shown here but is now trading at a level which generally triggers selling/market top.

Stock Market and S&P 500 Trading and Investing Conclusion:

In short, I am still bullish on the market as I focus on trading with the trend. I do not pick market tops and I do not pick market bottoms. Knowing that stocks make their biggest moves at the end of their uptrend and at the end of a down trend it's only common sense that risk is extremely high if you are betting against the current trend.

The best thing to do is wait for a technical breakdown and reversal that puts the odds more in your favor with much less risk and typically a clear line in the sand to exit the position if you are incorrect.

The last major stock market top that formed in September of last year had a series of strong news and strong price action persuading the herd to buy stocks. Instead, it was the last impulse wave up just before a strong correction took place. That is much like what we see now with the economic news.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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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