This week is supposed to be a big down week according to a few top traders I follow. It is supposed to be a potentially pivotal week. One of the main arguments being the mass complacency in the market right now based on sentiment figures.
This market sentiment chart is only up to date to August 4th, and I imagine the latest data point to even higher bullish sentiment. I believe we are seeing bullish readings that are as high as existed when the Nasdaq topped out in the year 2000. From a contrarian perspective this is a concern.
It means that too many people are on one side of the fence and it could mean we could be in for some nasty and sharp downward spike corrections that catches most people off guard. That is typically how it always begins. You get this near zero volatility market action that puts people to sleep and gives them high confidence that the market just cannot break down. Then there is one key day that turns into a huge down day causing significant short term technical damage to the market trapping those who are heavily long. Then you get a more involved correction after that as fear starts to replace the complacency.
You have heard me talking bullish on the broad market and making mid 1970’s comparisons and saying that we have good potential to go much higher. I am still biased to that side. But how we get through the seasonally dangerous months of September and October remains to be seen. If we can get through these two months without too much severe damage then I see us getting a good stepping ground into end of year.
I just don’t see any valid 1929 comparisons right now. I have a hard time believing we are going to collapse downward now in a huge new down leg that starts an accelerated bear market longer term decline. The monthly MACD has turned up in our market as well as several key longer term moving averages.
I still see plenty of bullish action in many individual stocks and can see plenty of room for upside continuation. On the other hand some stocks have gone nearly straight up including many big cap stocks. Many of these may start to fall hard in the next week or two or three. So be alert for that.
It is possible that we could see a more ‘rolling’ type corrective process over the next few weeks were only the most overbought stocks get their necessary corrections in.
I am just getting this feeling that the next few weeks could be potentially very pivotal in terms of seeing a lot more volatility, perhaps a more severe downward correction and then also maybe even some fireworks in the gold market. If we do get a more severe downward correction in the stock market, it is going to be interesting to see if gold can keep its head up and get a move up going even in a downward broad market.
I just recommend being on alert for at least the possibility of big downside action in the broad market that may affect all stocks. Perhaps take a more cautious approach and be extra selective and prudent with risk management. The super high bullish readings we are seeing now need to be respected from a contrarian viewpoint.
P.S. I might not be able to post anything tomorrow (Monday the last day of August), so be on the lookout Tuesday for more updates and discussion.