Thursday, February 17, 2011
It seems almost silly at this point to continue warning against the risk of a broad stock market correction.
The negative technical indicators flashing warning signs have been going off for so long, even the most stubborn bear has to question his validity. However, it is usually at this point of maximum frustration that the natural ebb and flow finally returns to the market.
The situation in the market today is quite similar to the action we saw last April. Stocks continued to make broad gains despite many technical indicators warning of an impending decline.
The uptrend was so persistent, it forced a lot of bearish traders out of their positions before the market finally reversed and headed lower – dropping 18% from May to July.
I expect we'll see something equally severe this time around. So I'm holding a few underwater put positions in my S&A Short Report portfolio. I'm even adding more short exposure – this time in the copper market.
Copper is considered a leading indicator for stock prices.
Copper prices peaked in mid-April last year (the blue circle), just two weeks before the stock market entered its correction phase. And by the look of the following chart, copper could be close to a top now, as well...
You can see the rising wedge pattern on the chart, with the negative divergence on the MACD momentum indicator.
This pattern usually breaks to the downside. In this case, a breakdown below the support line of the rising wedge projects a move all the way down to at least 380. That's a drop of about 20%.
I like this chart setup so much, I'm currently recommending a bearish position on one of the big copper mining companies to S&A Short Report readers. If copper declines 20%, the whole copper complex will get crushed. And as we saw last April, a big decline in copper tells us stocks will likely follow.
Best regards and good trading,
The stock market can be dangerous right now. But our Growth Stock Wire editors have been keeping their eyes peeled for some safe trades you can make today...
Canadian energy companies booming... Suncor and Canadian Natural Resources soar to fresh two-year highs.
Canadian banks, too... Toronto Dominion and Bank of Nova Scotia break out to new all-time highs.
Chesapeake Energy surges 50% in six months… even though natural gas prices are still below $4.
Treasury breakdown takes a pause... big fund TLT trades sideways over the past week.