The news: The market keeps grinding higher, consistently making new highs despite seemingly everyone trying (and failing) to call the market top.

How to spot the top: I use a 5-day exponential moving average and overlay it on the market. When we have a hard close below the level of the 5-period EMA, that’s when the market is likely to step back. So Thursday — when the market opened below the line but closed above it – was a fake-out.

The chart:

The Relative Strength Index (RSI) – which shows the market to be way overbought — increases my confidence that a close below the 5-period EMA will do the trick. You don’t need to look at a million headlines and indicators, just wait for that hard close; until you see that signal, the Standard & Poor’s 500 will keep trending up, no matter how implausible that seems. It’s elementary but it works.

How to play it: Whenever we see the signal, put your stops in at the high; that’s nice and tight so if it doesn’t play out as expected, you stop out with a paper cut. The reward on this trade would be to see the S&P 500 – which you can play using the SPDR S&P 500 ETF (SPY) or with leveraged plays on the index — fall back to the previous resistance levels, giving you a nice risk-reward balance on the trade.


Jason Bond runs JasonBondTraining.com and is a swing trader of small-cap stocks.

Author: Jason Bond

Jason taught himself to trade while working as a full-time gym teacher; his trading profits grew eventually allowed him to free himself of over $250,000 in student loans!

Now a multimillionaire and a highly skilled trader and trading coach, Over 30,000 people credit Jason with teaching them how to trade and find profitable trades. Jason specializes in both swing trades and in selling options using spread trades, which balance the risk of selling options. Jason is Co-Founder of RagingBull.com and the RagingBull.com Foundation which donates trading profits to charity. So far the foundation donated over $600,000 to charity.

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