Why trading could be tricky this week

The markets ended mixed today with the NASDAQ up slightly and the Dow and S&P 500 down slightly. There seems to be a real struggle going on as the averages have now moved almost straight sideways for the last 4 days.

Last week I suggested the likelihood that the market was transitioning from an uptrend to an oscillating market. A tool I used to discuss this was the 14-day RSI reading in the S&P 500. Today, the RSI moved slightly lower. This makes the bearish divergence that appeared likely now official.

In Wednesday’s column I suggested that a short index trade may be worthwhile on a gap up or move higher Thursday morning since the S&P had become quite extended. I took a small position on Thursday and have been holding it since. The sideways market action over the last few days has allowed the overbought condition to partially alleviate itself. (Although the SPY has managed to close higher 7-days in a row now.) The edge that was apparent Thursday morning is now diminished. Nimbleness when trading against the trend is important. I anticipate exiting this position tomorrow whether it follows through or not. I will then look for another entry when I feel the market has once again become overly stretched.

Although I don’t put too much stock in seasonality, traders should be aware that the period around the Thanksgiving holiday tends to be one of the most consistently positive. This makes holding onto a short position Wednesday and Friday especially dangerous. Should the market manage to move up further this week and we see seasonality and trend win out over somewhat overbought conditions, then Monday could offer another opportunity to try a overbought-short entry. The major news over the Thanksgiving weekend will be retail sales. If the market moves higher this week, and then retail sales come out good, we could see a gap up Monday morning. This gap up should be short-able -- although I’m getting a bit ahead of myself right now. Anticipating opportunities is much less important than recognizing them when they arrive. However the market stretches in the next few weeks, up or down, I will be looking to play the oscillations.

Best of luck with your trading,

Rob
Rob@HannaCapital.com

For those who may be looking to expand their knowledge beyond just market timing, my Hanna ETF Money Flow System utilizes the VIX in generating trading signals for spread trades.

Rob Hanna is the principal of a money management firm located in Massachusetts. He has spent the last several years developing and refining methods for trading in stocks across multiple time frames. He selects stocks using both fundamental and technical criteria, and then trades them using technical analysis techniques.