Trader who bought into the stock market rally the day Donald Trump got in, are now starting to panic, because since that day the S&P has rallied almost 200 points and it might be time to sell. This sort of move has not happened in about 40-50 years, and things might have become a bit stretched.
Although this is just a short term event we are talking about here. But just in the last week or so it is the first time we are starting to see the hallmarks or beginnings of exhaustion. If you look at the BTIG indicators that are a group of indicators that track the stock market in terms of overbought and oversold, and they are currently at extreme levels hinting the stock market is in an area of overbought.
For the first time in many months, these indicators seem to be flashing a sell signal. Based on the same indicators, there was a very extreme buy signal at the beginning of Novembers 2016, and now they have hit extreme overbought conditions. It’s when these signals hit extremes and flash a loss of short term momentum, that is the point of time where you must start to worry. That is not to take away, we are seeing a widespread series of breakouts in the indices, however when you are in charge of your trade, and you find an indicators that are not only reliable but historically are uncanny with timing and major turning points in the stock market, that is something that needs to be listened too.
This does not mean the stock market will crash starting next week, but it’s a clear signal that traders should take heed and keep watch of their portfolios going into the end of year.
This is a great way to get tactical help without having access to someone on Wall St. sitting watching the stock market all day. It will help you determine whether you should be entering or exiting the market, based on Risk vs. Reward. Over time this sort of indicator has been seen as extremely accurate and also, seen as responsible for raking in huge profits for traders over the last 10 years.
So, should you rely on continued momentum, or is now the time to get out of the way from Mr Market? Well if the question was put forth like that, the answer would be right now, would definitely be time to take a break.
When it comes to talking a correction, how far could we go down, as we head into Christmas. Well, due to seasonality playing out at the moment. Which clearly states December as being one of the strongest months on the market, we could get some sort of correction, but if there is not continuation of a sell off, the market is likely to draw down for a few days, to a week, and then likely to continue on its bullish trajectory. But be that as it may, there is no doubt market extremes and the stock market indicators are showing just how extremely overbought we are here, and in the past that has been the perfect recipe for sellers or violent selling to come in, and it’s better to be safe than sorry as a trader.