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Time to short the market

It is very rare that there is cross between daily and weekly RSI as it is now for small cap and S&P, Nasdaq, and a few commodities such as copper, silver.

For RSI to reach 75 on a weekly basis it requires persistent capital inflows into a particular asset class, positive sentiment and prolonged overbought conditions (higher highs) on a daily basis. This confirms that market can stay overbought for a long time, however throughout my research across multiple asset classes I found that once there is overlapping between daily and weekly RSI at levels above 70 (or below 30), that reflects the inflection point at which the price of a particular asset class is in its zenith.

This also goes along the line that going short (or long) at those point can be very trying and can hurt as price at their peak (bottom) like to jump. (check the copper for above 70 RSI or natural gas for below 30 over the past couple of weeks)

But these conditions are rare and offers high probability trade (success rate almost 90%) that in a few weeks ahead price will be below the entry point (cross daily and weekly RSI) . 

So the key here is not to get loose and go with too high leverage that can not sustain  interim spikes.

In my view S&P is process of reaching 1346-50 (76% Fibonacci retracement of previous highs), however, we will test resistance around 1210 (61.8% ) before we resume up. We currently sit at 1271 and my shorts breakeven at 1266 with ability to sustain the move up to 1289 without blink of eye. We are also about half way between 1210 and 1350 with six weeks of consecutive gains in which we climbed 100 handles since 1st Dec.

The pace is unsustainable as its projection to May would lead us to 1500. But instead of consolidation I expect sharp correction followed by fast retracement, sort of zig zag price formation. The reason why I expect sharp correction is that boom in commodities needs to be deflated very soon otherwise it will create demand destruction as multiple commodities are at their record highs and threaten to derail global economic recovery. Its all about price elasticity and we are at higher highs then in 2008 when the marginal input costs broke the camels back.

But what will get people talking is QE2, if rally from Sep to Dec was based on expectations of soft economic data and continued Fed asset purchases, in the current environment of strong economic data we need to discount some price expectations built up in run up to Fed QE2. Remember, we rallied almost 20% on Fed QE2 so backing down 5% is not so much.

Disclosure: I am long VIXX.