On Monday I wrote about a low risk opportunity for the bears with very well defined risk. Market sentiment had reached an historic extreme as investors had become beyond bullish and giddy. They are downright greedy. Market greed isn’t corrected quickly nor painlessly. It normally takes a sharp decline in stocks to create some fear and panic that things have changed. The problem with playing this is that markets can stay irrational longer than you can stay solvent.
With that said, we wait for something in price to indicate that the bears have an opportunity. Last Friday, stocks opened at their highs for the day and closed near the lows. That represented a one day pattern called a “key reversal”. While one day patterns do not possess significant strength, they do give a very close point where you know you are wrong. In this case, closing above Friday’s high was that point.
It didn’t take long, but the trade was wrong immediately, meaning on the close one day later. Cut your losses, lick your little wound and move on. The historic level of greed hasn’t changed. Risk remains. That could go one for days, weeks or even months. We sit tight and wait for another set up or perhaps stocks decline without a good risk/reward opportunity. In any case, it’s hard to throw more money into stocks right here or increase risk.
