Spotting Market Tops (Preview)

By Lawrence G. McMillan

Without a doubt, the hardest thing to do in the stock market is to spot a major market top before it happens.  Bottoms are much easier to discern.  One reason for this is that bottoms tend to be “V” or “W” affairs, with sharp downward spikes and sharp recoveries, but tops are “rolling” things that can take what seems like forever to complete.

I have been at advanced technical analysis seminars where it is merely assumed that a qualified technical analyst has any number of indicators that will identify a quality bottom.  For example, in the last Brexit selloff, we quickly got buy signals from “modified Bollinger Bands,” $VIX “spike peak,” “$VIX differential” and “$VXST differential” systems.  There were others as well, such as a Total put-call ratio buy signal.  But no such assumption is made about identifying market tops.  They can be psychological nightmares if you short too early and the market continues to go higher.

You might say that overbought conditions produce market tops, and you’d be right to a certain extent.  But there have been plenty of times when markets are overbought and just keep going higher for weeks and weeks.  The only people who can withstand that kind of action are either 1) the “analysts” on TV who aren’t trading real money, or 2) very stubborn people who likely cry “Uncle!”  and cover right before a market top.

The reason that this subject seems apropos right now is because $SPX is rolling along at new all-time highs while many indicators are overbought. 

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