Time For A Top?

So, is it time for a market top? Is this the start of the big one? Has the run ended and now the only place to go is straight back down?

Honestly, I don’t think so yet. I’m never one to make predictions, but let’s hash this out for a bit and see what kind of logic we can come up with.

First, the case for the bulls. They have the momentum, the charts and new highs. That might not sound like a ton, but in this game momentum is everything. With higher highs in place, uptrends intact, prices well above key moving averages, and buyers oozing with confidence, the bulls could hang around for a while before they feel compelled to really raise excessive cash. Although they might stumble a bit by way of profit-taking, some major changes are going to need to occur before they actually break a leg and fall, and I’ll be keying off the charts to make that determination.

Now, the case for the bears. I could simply say “China” here and that would be enough I know, but that’s not all there is to the story. Obviously, stocks with virtually any ties to the Far East (including their names alone) have made incredible runs, as have the solar stocks. In fact, speculation has run rampant in a great number of the smaller stocks, which in itself tends to raise some eyebrows from traders who know that they can’t provide leadership for a lasting run. We also have a bull market which just turned 5, so there are plenty who can argue that perhaps the advance is getting a bit long in the tooth. Furthermore, there’s the debt crisis, economic concerns, and a host of other fear factors which are pointed to regularly as potential causes for meltdown. At the end of the day though, these are simply arguments which I should note that the market is largely shrugging off.

The verdict? Of course the market always has the final say, and I will definitely defer to the price action when it comes to my trading decisions, but I’ve gotta go with the bulls based on the limited evidence we have of the selling we’ve seen in recent days. We’ve seen some distribution taking place, but so far no major technical damage has been done, and everyone can agree that even strong trends have bouts of profit-taking (just as downtrends have bounces) along the way. Will we go up forever? No, there will be bear markets in the future. I simply am not convinced that the past few days of selling is marking the beginning of a new bear market, as there’s no technical reason to call for an end of the trend.

Earnings season is just getting underway, and that could certainly have an impact on not only prices but market psychology as well, impacting the motives of both bulls and bears alike. Ultimately though, price has the final say and right now the long-term and intermediate-term trends are pointing up, in spite of some short-term profit-taking.

I believe prices simply got too extended in the short term and that some profit-taking is warranted. At TheStockBandit.com, we moved to cash last Wednesday and are letting this corrective price action play out without us while we wait for new bases to build. We’ll be looking to get active again before long, but for now the market weakness is causing us no pain.

Stay vigilant with your trading capital and don’t simply throw caution to the wind. Respect the pullback. Be wise in not only cutting losses quickly but also in booking profits along the way. If you’re playing the momentum game, be careful and keep one finger on the eject button. Let the charts guide your decisions, from entries to exits, and as long as you do that, you shouldn’t even be concerned which direction things go from here.

Trade well out there!

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]