How to Identify the Short Term Market Peak

Good morning! Today we continue with our investing series.

You can check previous posts about

Index and mutual funds

How to start investing

Investing, what is the point?

Top 4 Authorities in the Financial World

Risk and reward are NOT related

Stock picking: buy the leaders

 

For short term investors and traders, it’s crucial to recognize the short term market peak when it happens.  I’ve already discussed the characteristics of long term, multi-year bull market peaks. This time we’re looking at short term peaks (that are not new all time highs) and their characteristics to help you maximize returns on your private investments.

 

Define a Short Term Market Peak

Before we identify the common characteristics of a short term market peak, we must first define this term. Here’s an example – GDX, the gold miner’s ETF:

No New All Time High

As you can see from the chart above, this type of short term market peak is not near an all-time high. Rather, the market has fallen for a while, and this is the short term market peak during one of the waves in a subsequent uptrend.

Time Frame

The “wave” lasts just a few months – anything longer than 4 months, and this is not considered to be a “short term” market peak.

The Above Example

As you can see the chart for GDX (gold miners ETF) above, GDX has fallen for almost a year now (which coincides with the decline in gold and silver). Only recently has GDX moved off of its lows. This fits in perfectly with the “short term” market peak concept. GDX is nowhere near an all time high (in fact, it GDX just hit bottom), and this recent wave has only lasted over a month.

Identify the Peak

When you make short term investment decisions, you absolutely have to use technical analysis. However, the problem is that there are many technical indicators. In the event that these indicators are sending mixed signals, which one should you use? Which one is more important and can override the others? I honestly don’t know.

HOWEVER, I do know that when all the technical indicators align and point towards one direction, the probably of that happening greatly increases. If all my technical indicators send out a clear SELL signal, then the odds of the market falling is very likely.

Regarding short term market peaks, 4 things will send a clear SELL signal when they all happen at the same time:

1. Major resistance.
2. Heavy volume.
3. Intraday bloodbath.
4. Connections between markets.

Major Resistance

Markets will often peak at a price that was a massive historical resistance point. If you look at the GDX chart below, you’d notice that GDX failed to break through this resistance barrier multiple times in the past 6 months. Thus, the fact that GDX is right below this resistance level today means that it will likely fail to break this resistance (again). This sends a major warning sign that the short term peak is in.

Heavy Volume

A lot of traders like to look at volume – I don’t really know why. They believe that volume sends a lot of clear signs – personally, I can’t seem to make volume work to my advantage.

However, volume is really useful when the market faces a major resistance and promptly falls. Such a decline in market price combined with heavy selling means that the market is very weak. Thus, a clear warning sign that the market might peak is sent.

Massive Red Intraday Bar

If the market falls really hard one day without any meaningful support, it will create a massive red intraday bar. This means that the market is really, really weak because there is virtually no support. Coupled with heavy volume, this sends a clear sign that the bears vastly overpower the bulls.

Connections Between Markets

I don’t just look at one market – I look at 8 markets. I look at multiple U.S. stock indexes (Russell, S&P500, NASDAQ), multiple commodity markets (gold, silver, copper, oil), and currencies (primarily the EURO/USD pair). Why?

Because markets are highly correlated nowadays, what happens in one market will affect other markets. For example, I recently believe that the short term peak for stocks is in. Thus, stock prices will fall. When stock prices will fall, it will likely drag down gold and GDX (gold miners) prices with them.

Summary

When the following three things happen at the same time, it is very, very likely that the short term market peak is in:

1. A massive red intraday bar.
2. Heavy volume – this is the only time when volume is useful.
3. A massive resistance line that has stopped the market on multiple occasions.
4. Other markets are falling, dragging down this market with it.

 

This post was featured on the Carnival of Financial Planning, thank you!