The market is at a crossroads moment and I expect to see a decisive move – one way or the other – in the coming days.
On the bullish side of the road, there is optimism that last week’s Libya-induced pullback was an overreaction by investors. After all, the economy is still showing signs of improvement and, despite a strong uptrend since September, market multiples remain below historic overvalued levels.
From a technical standpoint, bulls were able to cheer the NASDAQ’s clear support at the 50-day moving average line, a break back above the 3-month trendline, and a close on Friday in the upper-half of last week’s range.
On the bearish side of the road, some analysts are concerned that last week’s surge in oil prices is only the beginning of a larger trend that would become a huge weight on the shoulders of a fragile economic recovery.
Technically speaking, bears point to the fact that the NASDAQ does look due for a rest and last week’s rally attempt on Thursday and Friday came on weaker volume.
As a trader, the wise move here is to take your foot off the gas as we approach this crossroads moment. Let the market give us a clear signal before aggressively moving in either direction.
I would not initiate any new long positions (with the exception of top-rated energy stocks that give strong technical reasons to do so). Now is also not the time to establish short positions.
We must wait for the market to give us a clear signal before making our next move. This signal should come within the next few sessions.
What is a clear signal? A strong move by the market on increased volume.
An accumulation day, where the market climbs on increased volume, would be a signal that last week’s pullback was just a quick blip within the market’s continued uptrend.
A distribution day, where the market drops on increased volume, would signal that this downtrend is for real and it that it’s time to start looking for short-based trades.
The point to remember is that now is not the time to make an aggressive guess on where you think the market might be headed. Trust the action of the market; it will tell us what to do next.
We should receive a decisive signal at some point this week.
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