Stocks preparing for pullback — buy bad news, sell the good

The S&P 500 remains in a strong uptrend, but the index has posted a sizable gains for 2013 thus far so it’s only logical that a pullback within this bull market takes place sooner than later.

With May now upon us and historically prices fall more times than not, I feel a 3-4 weeks correction is on the verge of starting. This Friday we just had very strong economic numbers confirming the economy is recovering. This news has sent stocks sharply higher as shorts cover their positions and investors who are not yet long get into position to profit from higher prices. But the herd psychology and their trades are typically incorrect as they invest based on fear and greed. The old saying of ‘buy on negative news and sell on positive news’ will typically get you on the correct side of the market more times than not if used with price, volume and cycles.

The Technical Traders – S&P 500 Index Weekly Chart

If we look at the price of the S&P 500 we need it to breakdown below the recent pivot low before I become bearish.

Volume, which is not shown on this chart, is below average as price moves higher and this is a bearish sign also.

Looking at a basic cycle using the stochastics indicator we can see that the current cycle is starting to turn down. Cycles tend to lead price during an uptrend so we could still have stocks move higher for another week or so but be aware that when price starts to drop its likely a market top. But until then you must respect the uptrend. Stocks can remain overbought and toppy looking for months… so don’t be gambling and trying to pick a top until we see breakdown start.

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