More Definite Signs of Topping

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A point I've always mentioned on this blog is that when a major uptrend ends, there is often a larger and faster decline than any in the uptrend. That is logical confirmation that a larger degree move is occurring. So the things to look for are larger, faster, and (eventually) more time-consuming moves than any prior corrections in the uptrend.

That correction last spring was dramatic, but IF this is a bull market high, it is reasonable to expect a larger and faster decline than that from the highs. That is hard to believe in advance that that could happen, but it is reasonable.

Several commodity markets are breaking down and suggest major highs are in. This adds evidence to the idea that we may be in the early stages of a general liquidity contraction and move to stronger US Dollar and weaker stocks and commodities.

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Today oil formed a wide range bar. The USO etf made a super high volume bearish engulfing candlestick pattern and a bearish outside bar pattern. This occurred at a prior resistance swing high, in a zone of prior unfilled large gap down which may be a reversal zone after retracement, and also it formed at the upper Bollinger Band in some what awkward configuration.

So with the high profile news out and huge volume, we can infer that the larger players are seeing fit to unload oil at this point in time, presumably to less savy late comers. Looks like a market to get out of and or to possibly short with a well thought out strategy.

Also the GLD gold ETF, formed a bearish engulfing pattern at the upper Bollinger Band and in the zone of prior highs which may be resistance. A reversal in these markets portends a turn up in the US dollar and a decline in commodities and likely stocks as well.

New Trade - SPXU

Buy SPXU with a day only limit order of 16.69 with a GTC sell stop at 15.60 after entry if filled. That puts the risk around 7% on the issue, so adjust the position size to be consistent with the risk per trade you see fit.

Likely At or Near a Major High in Stocks

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I believe the current top being put in is likely to end this uptrend and most likely lead to a major decline that will qualify as a bear market. This pattern update above builds on the patterns suggested as likely/possible over the past year. See the prior post for a little longer term look.
Based off the similarity of the current leg up to the one prior to the November correction, this looks like a double combination pattern to me. Triple combinations are pretty rare so I think the end of this pattern will lead to a larger correction than any since November at a minimum, and given the larger pattern since the bear market lows, this will probably result in a larger correction than even the April-July 2010 correction.

As a first level of confirmation that this outlook may be correct, we should see the current decline be larger and faster than the November decline in the S&P 500. That would indicate a larger degree correction is occurring than the November decline.

The further this bull market has gone, the less likely from a historical perspective that any subsequent bear market will go lower than the 2009 lows. That would basically be a first in the history of the US markets. Now Japan did experience periodic bull markets in an overall long term deflationary bear market over the last 20 years. So if the US, or world, go through a major deflationary period, Japan would be the best precedent to look to.

As a general guideline right now, I would again suggest that increasing cash % in a portfolio is sensible if there is a well reasoned strategy to re-invest in the future at lower levels. Again commodities are overbought, so I would not personally suggest moving into gold, etc. I think that would be a mistake. Also, it appears that US treasuries are in a bear market now, so while there may be intermediate term rallies, I think on an investment level, that will not be the safehaven that many have come to expect.

Update - Continued Topping Action in Commodities

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Here is an updated longer term view on a prior post. It puts the S&P 500 in the later stages of a large complex upward pattern that may be near completion or last a few more months. There was a minor pullback in November, but it obviously gave way to new highs.

I believe the market is once again extremely close to a significant pullback or correction. The precious metals are badly lagging the new highs in stocks. Commodities in general are overbought and could pressure stocks on a correction. Also there has been a major news event in recent days seemingly bullish for commodities, though after extended moves up. This has a distinct possibility of drawing dumb money in as the news comes out, while the smart money uses this as a convenient liquidation point in those markets. So I think the Egypt news and oil spike, etc, etc, fit nicely with the idea of a topping commodity market from a contrarian standpoint.