13 Technical Signs That Preceded Major Tops
- Posted by JC Parets
- on December 30th, 2013
There are only a couple of days left in this record year. Anyone who has called for a major top in the US Stock Market at any point in 2013 has gotten it wrong. There have been some short-term shorting opportunities for sure, especially in individual stocks, but a major top in the S&P500 has been no where to be found. My friend Mark Arbeter over at S&P Capital IQ sent me his list of technical signs to look for that have preceded many major tops in the past:
But first, here is the simple reason why we look for technical signs, and ignore everything else:
“The Law of Supply and Demand is universally recognized in both academia and the business world as the foundation, the starting point of all economic analysis. The Law of Supply and Demand states that when demand for a freely traded commodity exceeds the supply of that commodity, its price will rise. And, if the supply of that commodity exceeds the demand for it, the commodity’s price will fall. Notice the lack of equivocation. No mights or coulds or shoulds, just will. It’s the Law. And, since common stocks are a freely traded commodity, their price movements are dictated by the Law of Supply and Demand – the starting point of common stock analysis (and, therefore, stock market analysis). As such, it is difficult to imagine why it is not at the core of every investor’s portfolio strategy.”
With that, here are Mark Arbeter’s technical signs to watch for next year:
1. Major topping pattern such as a head-and-shoulders or double top that takes many months to trace out. Not seen yet.
2. Increase in price volatility, both on the upside and downside. This would be part of the topping formation. Not seen yet.
3. Internal divergence with respect to the NYSE advance/decline line. Generally, A/D line tops months before prices. Basically, a move to extreme selectivity by investors. Not seen yet.
4. Internal divergence with respect to NYSE new highs as a percentage of issues traded. Currently being seen.
5. Weekly momentum divergence(s) on the major indices. Not seen yet.
6. Very steep price slope or blowoff move of major indices. Could happen with a very hot group. Not seen with the overall market, but being seen with social media stocks.
7. Weakening relative strength from small and/or midcaps vs. “500.” Currently seeing minor divergence with both small- and mid-caps.
8. Sentiment is the one area that is issuing a warning, but it has been for quite some time. We think these indicators are moving to their secular bull range from a secular bear market range. We think a price correction that resets sentiment back to neutral or bearish would be bullish from a longer-term perspective. Investor’s Intelligence bulls are now at 59.6%, highest since October 2007, while bears are at 14.1%, lowest since March 1987.
9. A period of distribution during a period of a couple weeks. Heavy volume selling of individual stocks as well as the overall market. Not seen yet.
10.Topping action in the relative strength leaders. Not seen yet.
11. Spike in Treasury yields. Not seen yet.
12. Low priced stocks, or those below $5, catch fire. Some evidence here.
13. A move to a very big round number after many years of rising. That is S&P 500 running to the 2000 level, which is only 8.6% above current prices, or the DJIA advancing to 20,000, which is 21% above current prices.
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J.C. Parets is the Founder & President of Eagle Bay Capital, LLC. He earned the Chartered Market Technician designation (CMT) in 2008 and now actively manages money incorporating Technical Analysis and Behavioral Finance into his practice More
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