Don’t be fooled by the market’s apparent recovery in the last week. With technical indicators pointing to a market top at 1150 for the S&P 500, the short sellers could be benefiting in a big way later this week. Here’s everything you need to know to make a smart downside trade…

Before we go and buy stocks blindly based on emotions, we need to take a look at the indexes first. Why? Because most stocks trade in tandem with the indexes and success in the market is all about knowing what’s happening and executing your trading plan based on that.

At first glance, the market’s near resistance, the Relative Strength Index (RSI) is in the overbought zone, volume is questionable, and full stochastics are overbought. Digging deeper, fans of Elliott Wave Theory may notice that off the March lows we have an Elliot Wave 5-waves pattern showing.

This means we’ll likely either top out right here at a retest of the highs or this is the final leg of this rally.

As far as the chart above goes, it’s all about that little pink line, a downside break of it and expect markets to move lower. But until then I wouldn’t make any broad bets against the market…

The same goes for the NASDAQ Ccomposite, except it had some volume to it. Look at every time the RSI peeks at or above the 70 level (circles in red up top) – both of the last two that RSI level was met with a top in the market. It’s likely we’ll see the same thing happen this time around.

From a daily perspective,these two charts are telling us to stay away and wait for some sort of a pullback in the indicators. With investors becoming increasingly bullish right now, that’s an important contrarian message to take heed of.

Moving on to the 60-minute time frequency we see the same things. RSI is overbought, full stochastics are overbought and near trend channel resistance.

As you can see though,this index is just an opening gap away from the 1150 level. The big question is whether or not we’ll end up testing that 1150 level. Since I’m not a buyer at that level, hitting it matters a whole lot less to me than bouncing back off of it does.

I suspect that even if we do hit it, it won’t initially stick anyway. I need to see some sort of pullback and the RSI and full stohcastics to get oversold to get interested on the long side, and even then it would be hit and run — get in, get your point or two and run..

Under the surface there is no denying that there were some names that just came right up and out into new highs like a rocket. Some of these names were out of sound bases and others had no basing structure. Ultimately, we’re going for a bearish bias right now, so we’ll avoid racking up long positions that could work against us in the next week on a bounce off of index resistance.

I’ll let you know when it’s time to take action once again.

Sincerely,
David Grandey, AllAboutTrends.net
for Penny Sleuth

March 10, 2010

David Grandey

David Grandey is the founder of All About Trends, an email newsletter service revealing stocks in ideal set-ups offering potential significant short-term gains.  A successful canslim-based stock market investor for the past 10 years, he has worked for Meriwest Credit Union Silicon Valley Bank, helping to establish brand awareness and credibility through feature editorial coverage in leading national and local news media.

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