Although stocks managed their third straight round of gains yesterday (June 27), it is risky and probably a bit too early to establish new long positions right now. This is because several of the major indices are now running into new overhead resistance of their 20 and 50-day moving averages (remember that a prior level of support technically becomes the new level of resistance after the support is broken).
One such example of this moving average resistance can easily be seen in the ETF proxy for the benchmark S&P 500 Index ($SPY):
Notice that yesterday’s (June 27) intraday high in $SPY perfectly coincided with near-term resistance of the 20-day exponential moving average (beige line). After testing that resistance level, $SPY subsequently closed at its intraday low. Furthermore, the 20-day EMA has recently crossed below the 50-day MA (teal line), which can be a signal that an intermediate-term uptrend may be reversing.
Because of the overhead supply and technical resistance levels currently confronting stocks, the market may be subject to a pullback over the next few days. At the least, it would be reasonable to expect stocks to chop around and consolidate a bit before moving higher.
In many cases, the first bounce into resistance that follows a sharp selloff (like we saw last week) provides low-risk entry points for new short positions, in anticipation of another leg down in the market. However, this time we are NOT convinced that selling short right now is the right thing to do. Why? Simply because leading stocks have been holding up pretty well throughout the market correction.
When leading stocks are not breaking down en masse, stock market corrections are typically short-lived. Paying attention only to the price action of the main stock market indexes, while ignoring the price action of leading stocks, is a big mistake that new traders frequently make. They fail to realize that the major indices usually lag behind leading stocks, and not the other way around (major indices setting the pace of leading stocks).
So, if it’s too early to start buying stocks right now, but conditions are also not ideal for initiating new short positions, what is the best plan of action right now? Having a bit of patience and sitting mostly or fully in cash for at least the next few days is probably the best bet. Dipping a toe in the water through buying one or two positions showing relative strength AND with reduced share size would not be too risky; however, this is definitely NOT the time to be aggressive on the long side.
Quickly and easily find the strongest stocks that will lead the next market rally with the new MTG Stock Screener. Try it for FREE at http://screener.morpheustrading.com.