The stock market’s winning streak continues.
We’re eight weeks into 2019, and we’ve seen eight straight weeks of higher stock prices. The S&P 500 is up almost 12% in less than two months. The momentum is strong. The price action is undeniably bullish. And it feels like stock prices will just keep pressing higher, forever.
But, the air is getting really thin up here.
Take a look at this updated chart of the S&P 500…
This has been a stunning rally. And as long as the S&P remains above its 9-day exponential moving average (EMA) – the red line on the chart, which has been support for the past eight weeks – the bulls get the benefit of the doubt. But, the problem with a stock market that moves higher every day is the potential sellers just keep building up. And, when all the sellers finally decide it’s time to leave the party, they rush for the exits all at the same time.
That’s when we get the type of swift decline like we saw last February, which wipes out several weeks worth of gains in only one or two days.
That’s my biggest concern right here.
The last 100 or so points on the S&P 500 have been inspired by the potential for a trade deal with China. Stocks rallied hard on Friday, following another positive headline. So, that bullish news is being milked dry. What happens when a deal is finally done? We’ll need to find some other potential bullish news to milk. Otherwise, we’re likely to get a “sell-on-the-news” event.
That’s why, even though price action is bullish, I want to have a small short position – because, with the current conditions, price momentum can shift quickly.
AGAIN… I repeat… it is still too soon to get aggressive with short trades. Price action needs to reverse, and the S&P 500 needs to close below its 9-day EMA in order to shift the short-term momentum to bearish. But, a small short position – if only to hedge some long trades – is reasonable at this point.
Best regards and good trading,
Jeff Clark
Reader Mailbag
With the current action in the stock market, are you bearish or bullish? And how are you trading with that sentiment?
As always, you can send any other trading questions, suggestions, or stories to [email protected].