Monday, February 11, 2013

How Major Mark Tops Form

"Major market tops generally form in two phases. The first phase, as discussed in the previous chapter, marks the end of the uptrend and the start of the distribution phase. During the first phase, however, buyers remain active, buoyed by hope the bull market is merely resting. 
This hope is reinforced by most economic data, which remains upbeat and pointing towards continued growth. Earnings for individual companies remain strong with analyst estimates indicating continued growth for the quarters ahead.  
But the stock market is a discounting mechanism, with prices based on expectations, not current conditions. Consequently, market tops are not made amid gloomy predictions of slowing economy or recession, but when conditions for future growth may appear brightest. 
Likewise, major market bottoms occur when the outlooked seems darkest - a primary reason why so many investors sell at or close to a bear market low and then are reluctant to re-enter when a new bull market begins. 
In the second phase of a major top, signs of buyers fatigue becomes more evident, while selling becomes more aggressive. Typically, buyers become increasingly discouraged, as fewer and fewer stocks keep pace with the gains in the market indexes."
Using the works of L.M. Lowry and R.D. Wyckoff to identify key market turning points from the book titled: Mastering Market Timing.

A quick update on this Monday afternoon Asian time: technical setup from the the previous two posts, which in particular has me tracking Gold and Aussie Dollar inflection points, look like this:

Chart 1: Gold is looking weak and could break down...
Source: Bar Chart / Short Side of Long

Chart 2: ... while Aussie Dollar might be breaking already.

Source: Bar Chart / Short Side of Long

There is evidence of price weakness in various risky assets from credit spreads (corporate bonds) to EU equities and risky currencies from the commodity complex. None of these are confirming the recent euphoric rise in the S&P 500. More on that throughout the week!

What I Am Watching