Tuesday, January 22, 2013

No pullback, no problem?

I am not going to advocate shorts here, but continuous parabolic ascent with no pullbacks is not healthy, and usually results in a sharp decline. Why? The higher the market goes without offering the shorts to cover lower, the more of a chance the market will fall when those same shorts are stopped out at higher levels. Does it make sense? It surely does. Look at the volume - it is anemic and nonexistent on these latest advances higher to 5-yr record levels and all-time highs on some indices. What does that tell you? Not many new longs are being initiated, but just short-covering gasps for air is what drives the parabolic move. As the shorts get exhausted, capitulate, and step aside, there will be no one to buy when the longs finally decide to sell. This phenomenon creates sharp declines and even mini flash crashes (I am not calling for one here), and is due to pockets of air when all bids are pulled. Be very careful if you are a new trader, this is not the time to go long at all. Being flat is a position too, I am not advocating shorts here. Let the market cool off a bit.

click on chart to enlarge

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