Written by Lance Roberts, Clarity Financial
Last week, we discussed how the market successfully retested and held the 50-dma and rallied enough to turn money flows back positive. We addressed this point on Thursday in our daily “3-Minutes” video (subscribe for daily updates),
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“While the money flow ‘buy signal’ will likely trigger next week, the market is already trading 2-standard deviations above the 40-dma. Such suggests that the upside may be more limited over the next couple of weeks.”
As the market struggled to hold gains, as denoted by the two red-dashed lines, that was the case. Notably, the entire week’s gains came in the last hour of trading on Friday.
With the money flow signals still positive, the overall bias to the market remains bullish for now. However, the rally is still at risk currently, given the more extreme overbought and bullish conditions. Speculation remains rampant, and there are many indicators from relative strength to participation that suggest we could see another correction in March or early April.
When our money flow indicators turn lower again, we will suggest reducing risk accordingly. However, the problem with all technical indicators is two-fold:
- They don’t distinguish between a 5% correction and a 20% drawdown; and,
- Secondly, the corrections often occur so quickly you don’t have much time to decide just how defensive you need to be.
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