1 Year TSX Index - daily prices (Click to Enlarge)
The chart shown is a daily price chart of the Toronto Stock Exchange for the past year. We have been following along a nicely defined channel during that time. It presents an almost classic Elliott Wave 5-wave pattern. The convergence of the upper channel line, the price candles, and last trend line all suggest we should be very close to a top. Looking at a chart of the S&P500 Index, I get a very similar result.
It is too early, yet, to tell if 20 year U.S. Treasury bonds are making a bottom (if only for the time being). We are seeing a second week of gains for them after closing in on an almost three year trend line. Earlier I blogged about the bounce in the commodities index. It has now been going sideways for a couple of weeks.
It is impossible to call the exact top. If anyone could do that, they would be more famous than Warren Buffet. The point is, the likelihood of a correction in the market at this point, is greater than that of the market duplicating last year's performance without, first, correcting (despite any and all quantitative easing). We never know what event will trigger a sell-off, but something will come along, people will perceive it as negative, and down goes the market. Buy-and-holders won't care - they won't be happy, but they'll wait it out. Me, I have already taken my profits. I don't trust the markets to go much higher, so I am preparing for the correction.
As for the cause of market tops, I don't want to imply they are caused by certain events. The real cause is the lack of new money being put into the markets. A top comes when everybody who wants to get in has done so. Buying dries up. It is rather like trying to inflate a balloon with a hole in it. As long as the amount of air going in exceeds the amount of air leaking out, the balloon will grow larger. Stop putting in air, and the leak will cause the balloon to deflate. Of course, if the leak grows larger, then the balloon deflates even faster.
I am not a professional, and I can not give you advice, but as I said, I feel this is a good time for me to protect some of my gains. I'm just saying!
Do you feel we are due for a correction? Have you taken any profits?
P.S. The basic timing model I blogged about earlier wouldn't currently give us a sell signal until the market has corrected by almost 10 percent. Where it would make us money is in the large corrections we see every 4 or 5 years, or so.