Weekly Dow Chart May 12

Attached is the weekly chart of the Dow Jones:

•  Momentum is confirming new price highs (but this is NOT the case on the Nasdaq)
• Price is clearly overextended in terms of oscillators (yet this isn’t a reason to reverse)
• Price is above the upper Bollinger Band (again, no reason to reverse)

My observations:  We are overextended and due for a correction (how many times have you heard this from others in the financial media or other bloggers?)

Another observation:  The market can remain irrational (beyond odds) longer than you can remain solvant (or run out of capital)

Trading is about odds and probabilities.  People see things differently, in that while some traders (like myself) see this environment as highly risky and are unlikely to initiate new long positions (and in fact, more likely to take profits on open long positions), other traders see this as a breakout and runaway market and can’t wait to get on board and are buying the market aggressively.

Who will win?  No one knows.  We only watch and play the odds, and in this case, with the stochastic above 80 (and possibly crossing), price above the upper Bollinger Band, price well overextended above the rising moving averages, and momentum making new highs, odds favor a correction/pullback/profit taking/etc.

However, just because odds say it will happen does not mean it will happen.  You can’t force your will on the market, and in such an environment (strong momentum move), you are either long or stay out of the way.  Otherwise you – like the bears and shorts out there – will sustain heavy losses, especially in a creeping or runaway trend environment.

Play the odds and be careful.  Control your risk either way.