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Forming a Major Top
I sold out of my mining positions yesterday and have turned my attention towards shorting the market for the reasons I'll outline below. I think there's a good case to be made for holding miners long term here but the reality is that gold and silver remain highly correlated to broader risk assets and there is undeniable evidence that the market is in the process of forming a major top. Rather than stay blindly long miners and hope that this correlation can magically reverse, I have instead booked solid profits and will watch to see how the trade unfolds from here. The case for entering market short positions is strong enough that I'm not too worried about missing out on miners if they happen to be able to break away from the market.
Long time readers might remember this article from last November which correctly predicted the sharp late November sell-off using this indicator as a proxy for the broader market. It has been my experience that when this is above 80, it is not a good idea to be long the market. If this was not above 80, I wouldn't be making this post and I wouldn't be shorting the market right now - that should tell you how reliable I believe this to be.
The chart of TLT speaks for itself I think. It is one of the cleanest technical setups you could ask for in an ETF that has been in a very strong uptrend for months. Combine the chart with the fact that TLT has never had a negative August since it began trading in 2002 and whatever your opinions might be on the US treasury market, you have to admit this looks like a solid buying opportunity.
EEM continues to significantly underperform SPY and is significantly below the highs from earlier in the year. The topping pattern over the last two years is significantly larger and better formed than it's predecessor from 2007/2008. Whether you put much faith in that or not, the fact remains this is a relative underperformer and thus it is my main short position right now.
FXA has a fairly strong correlation to the S&P 500 and as you can see it's currently testing major resistance from last year and earlier this year. When you consider than energy bullishness is now above 80%, it is extremely unlikely FXA will be able to clear 107 without a significant pullback first.
SPY is testing the highs from earlier in the year, EEM is significantly below its Spring highs, and FXA is up against major resistance. Energy bullishness is above 80% which is a reliable indicator that the market is severely overbought, a condition that can only be relieved with a decline of at least 100 S&P points. Complacency is high, we're in the month of August, volume is very low, and news flow remains a significant risk. I've already begun taking short positions via ERY and EDZ - tops can be a process and there is certainly some risk that I may be a bit early, but I am confident that shorting while the market remains above 1400 S&P is an excellent risk/reward trade. I anticipate we will begin the decline of at least 100 S&P points before this month is over.
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