The Major Indices Are at a Critical Crossroads

Now seems like the perfect time to take another look at the S&P 500 and NASDAQ 100 charts; as expected the equity markets managed to grind higher toward resistance areas and are starting to creep into overbought territory. Further, the masses appear to be jumping on the bandwagon and complacency is running rampant. In our view, this environment is conducive for a correction or at minimum a pause. Thus, it is probably a time for investors to play defense rather than offense and aggressive speculators might even want to nibble on bearish positions. To be clear, we aren't suggesting the bull market is ending; and we certainly aren't calling for Armageddon. The reality is it has been a great year for the bulls and there is nothing wrong with taking some downside risk off the table to see what happens. On the flip side, aggressive traders looking to short the market using futures, options, or some other vehicle can do so with a certain amount of comfort. After all, the upside potential is likely minimal in comparison to the downside risk posed by a possible correction. On a side note, the CME Group's suite of Micro E-mini futures is a great way to do this; they are efficient, leveraged but small and manageable, available for liquid trading 23-hours per day and offer tax benefits relative to many stock products. Feel free to contact me if you have questions about these products. Chart Source: QST As someone with a countertrend mentality, I pay close attention to signs of exuberance. While it is difficult to argue the market is dramatically overvalued based on multiples, there are signs of overheating in sentiment. For instance, the CNN Fear & Greed index ticked above 90 for the first time in a few years. Similarly, our analysis of the COT Report (Commitments of Traders) issued by the CFTC (Commodity Futures Trading Commission) suggests asset managers on the futures side are holding large bullish positions nearing levels that have triggered corrections in the past. Chart Source: QST Looking to the charts, in late October our NASDAQ and S&P 500 charting analysis was featured on the Off The Chart segment on Mad Money with Jim Cramer (click here to review). At the time, we were eyeballing the potential for a short squeeze in the NASDAQ 100 to struggle near 8240 and the S&P 500 somewhere around 3090 (with a potential blow-off high to 3150). The NASDAQ 100 futures contract peaked this week at 8248 and the S&P 500 future at 3090.50. Obviously, it is too early to assume these levels will hold but it is time to take notice and be woke. Chart Source: QST We hear quite a bit of chatter about a breakout, but in our experience, breakouts are a process, not a precise event. In other words, what looks like a breakout today might eventually prove to be a bull trap. Of course, such patterns are unpredictable due to the emotions involved; even bull traps can run wildly higher before failing. A good example of this would be the run from late 2017 that extended into early 2018 before collapsing. The moral of the story is: timing matters and managing emotions is critical. In conclusion, what the market does next could determine how the year ends. Will we get a repeat of the never-ending 2017 rally or the trepidatious decline of 2018? *THERE IS A SUBSTANTIAL RISK OF FINANCIAL LOSS IN TRADING FUTURES AND OPTIONS.

The Major Indices Are at a Critical Crossroads

It is probably a time for investors to play defense rather than offense and aggressive speculators might even want to nibble on bearish positions.

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