The Risk of a Market Correction has Increased Substantially

The recent rally in NASDAQ-100 and QQQ has some technical similarities with the one during the early part of 2010 that ended with a violent correction. Periods of persisting oversold conditions such as the present one (a 12-week NASDAQ-100 winning  streak) can be very problematic in the short-term unless a parabolic move is pending, like in 1999.

I do not think fundamentals are strong enough to justify recent performance and a violent correction will commence when the market will find an excuse for it. Therefore, risks are high at this point. In my opinion exposure to this particular market as a percentage of bankroll should be cut down to less that 5% through stop-loss application.

On the daily NASDAQ-100 chart below, in the indicator pane the pink line is the RSI(14) and the black line is the 14-day simple moving average of the RSI(14):

It may be seen that the 14-day simple moving average of the RSI(14) has remained close to or above a value of 70 for an extended period of time. An closer look will show that this is happening since the beginning of February.

On the same chart I have marked with a vertical line a similar situation that developed in the first part of 2010 with a top in the index forming during late April. A violent correction followed. The market started recovering after the end of the summer of the that year.

I think the current situation is more serious. Risk is just too high and an excuse will be found to shake out weak hands. Given the revived concerns about the Spanish debt and maybe the Italian one, the excuse may be around the corner.

Disclosure: no relevant positions.

Charting program: Amibroker (Charts created with AmiBroker – advanced charting and technical analysis software.”)


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