The Market’s Top Heavy
Monday, April 30th, 2007
By George Leong, B.Comm. for Profit Confidential
The stock markets continue to trend higher and are now above where they were prior to the late February selloff triggered by worries in China. All of our four key indices are up over 5% on the year.
Market sentiment continues to be bullish, but, if you are a trader, I advise caution, as the market risk is currently high due to the rate
of the recent gains. The angle of the recent rally on the DOW is above 45 degrees, a rate that I feel is excessive and could leave the market vulnerable to near-term selling pressure.
Markets are extremely overbought, so there is the added near-term risk of selling and profit taking. Watch for this possibility and consider this when trading in the near term.
Breadth on the NASDAQ as indicated by the advance-decline line, has been mixed with five of the last seven sessions at below 1.0. The five-day MA softened in the week to April 25 to 1.16 versus 1.47 the prior week. The five-day MA is below the 10-day and 50- day MA of 1.33 and 1.31, respectively. Without strong breadth, the sustainability may be questionable in the near term.
Also take a look at the volatility readings, which suggest stock markets may be at near-term tops.
The CBOE NASDAQ Volatility Index or VXN — a barometer of near-term market volatility based on NASDAQ 100 index option prices — is generally viewed as a contrarian indicator.
A high VXN indicates maximum fear and a possible market bottom. A low VXN indicates reduced apprehension and a possible market top.
The 5-day CBOE NASDAQ Volatility Index or VXN to April 25 fell to 12.64 versus 16.90 the prior week. The five-day MA is below the 50-day MA of 17.56 as well as both the 30-day and 200- day MA of 16.98 and 17.99, respectively. The continued lower readings could indicate a near-term top.
The CBOE S&P 500 Volatility Index or VIX is a barometer of near-term market volatility based on the S&P 500 index option prices. The five-day VIX to April 25 was 12.64 versus 12.50 the prior week. It is below the 30-day MA of 13.73 as well as the 50- day MA of 13.56. Continued lower readings may suggest a near- term top.
Bottomline: Be careful in upcoming sessions as market looks heavy on the top side.
Next Post: The Real Story Behind the Market’s Rise
Previous Post: Taking Advantage of Efficient Markets’ Limitations
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George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.



