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The State of the Trend
In his book, The Big Short, Michael Lewis gives a vivid example of what negative effects a trader's psychology may suffer when somebody is right about his trade but too early in its entry, even though the end result is a big gain and a very fat profit.
Since the turn of the century, there have been several occasions when the outcome of certain market moves has been pretty obvious, yet many got burned by the unexpected longevity of such moves. To wit: the current rally, despite the negative divergences discussed last week, is still progressing, and the trend remains up for the three major indices (DJIA, SPX and NDX) in all three timeframes (daily, weekly and monthly).
In fact, taking the daily SPX as an example, the trend will remain up even if the index drops to 1470. For those who can't stomach a 50 point drop from current levels only to find out later that the trend has indeed ended, the index has drawn a clear support line at 1514 which, if broken to the downside, will signal that the long awaited correction may finally be under way:
Interestingly, from the point of view of of market internals, the SPX is going through a rolling correction which, at the current rate, will lead to oversold levels in two trading days:
In practical terms, this is a cautionary signal regarding the longevity of the first leg of a potential downturn.