The market formed what looked like a head and shoulder formation on the weekly chart (red circle), with the right shoulder and the head identified by the red arrows. Eventually it formed the left shoulder and broke down below the neckline (green arrow) which most probably drew a lot of shorts... but reversed course and broke out upwards with a furious rally.
Now take a look at what the S&P 500 chart looks like at the present, with the corresponding red arrows showing a potential right shoulder and head:
Looks eerily similar right? From this point in 1987 to when the market started to zoom upwards into a new bull market it took another 5 months... so we'll probably be able to accumulate positions during this time period for the "real" bull move.Another signal that we're heading for a short-term top....
The market continues to head higher while the VIX has not a lower low... looks like a lack of hedging or too much complacency. Also, most good news like earnings, stabilizing housing numbers and more importantly the lower unemployment rate are already out.I think this will be a healthy correction since most of this upmove is characterized by peer-pressure on the part of hedge fund and other managers who have been left out of the rally. The real move 5 to 6 months right now will be characterized by more rational buying rather than panic buying. I am still a solid bull. I believe too much in the global reflation story led by the emerging markets (not the US or Europe). The US consumer will have its problems, but the global rebound especially on the back of China stimulus and strength of Brazil and India will compensate by providing export demand to the US.
Also, it is very important to buy fundamentally sound companies on this pullback to limit our risk exposure. More on the detailed strategy on how to time/buy on pullbacks on my next post.
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