Over the past week and a half we have witnessed the deterioration of great
stock set ups. Some we have traded and many more have been on our watch
lists. Essentially what is happening is we are seeing the type of stock
set ups that work well in strong markets fail to follow through, meeting
selling as they attempt to move higher on low volume.
This is typical behavior that precedes a market correction. It’s not easy
to see and the good set ups, which appear, serve the purpose of lulling the
crowd to sleep as smart money unloads into the rallies. This is why volume
is low on up days like yesterday; because smart money is not buying, but is
instead selling to the retail investors who are buying in hope of higher
prices.
The action is very subtle and takes some time to see it. We have been wary
of this behavior over the past week as we have seen some very good set ups
fail. The last couple of trading days has now clarified that indeed we are
witnessing quiet distribution. We have a rather large watch list, which we
have compiled over the past week. Yesterday, more than 90 percent of the
stocks on that list, which were looking good on Friday, failed to follow
through as sellers picked off the tops.
We are now fairly confident that we are close to a correction. Whether
it’s just a quick correction, like the one that occurred on February 27, or
a long lasting correction, like the one that occurred during spring of last
year we don’t yet know. The market is a flood with liquidity, so depending
on whether or not that liquidity is in danger of drying up or not is what
is going to drive the post correction market. Right now though, the market
is overbought and stocks are vulnerable.
It’s time to use rallies to open up short positions. In fact, it may have
been time to do so for the past few days now.
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