It’ll be to the downside.
Stocks are overbought right now. That’s clear. And there are times where extremely overbought markets get even more extreme. It looks like we’re now in one of those times. So the market can still work its way higher.

Buying into these conditions, however, is rarely a smart move. The risk/reward weathervane is blowing strongly in the direction of risk. In fact, we’re rapidly approaching the best short-selling opportunity of the year.

A few weeks ago in the State of the Market special report, I cautioned the bears to look out for a sharp rally. The market was just looking for an excuse to rally. Enter Citigroup (NYSE:C) (which I suggested was worth taking a flier on in last week’s article) with word that they made money in the first two months of the year.

Here is what I would suggest. First, if you are looking at the short-term, I would look for the market to continue to rally over the next few weeks. Getting the indices out of the historic oversold level we reached a few weeks ago. Second, if I am looking at the long-term, I might be wading in at this point, but I would not be diving in headfirst will all my money allocated to stocks.

I know many investment professionals say you shouldn’t try to time the market, but I have to disagree with them. You don’t have to time the tops and the bottoms, but you certainly should be adjusting your asset allocation based on whether or not we are in a bear market or a bull market.

How do you know which one we are in? There are hundreds of answers for that, but a simple one that I have been using and testing is a crossover of the 6-month and 12-month moving averages for the S&P 500.

Look at the chart below. Over the last 20 years, had you loaded up on stocks when the 6-month crossed above the 12-month, you would have been heavily allocated to stocks from late 1994 until late 2000, heavily allocated to bonds from 2000 until early 2003, back into stocks from 2003 until early 2008, and then back to bonds. Is it perfect? Of course not. It doesn’t get you in at the exact bottom and it doesn’t get you out at the exact top. But it does have you in for the bulk of the move.

How effective would this S&P timing signal have been over the last six years? Well I looked at three portfolio scenarios after the last bullish signal in early 2003 until the end of 2008.

Scenario 1- all money was put into four equity ETFs- the Diamonds (NYSE:DIA) (the Dow), the Spyders (the S&P 500), the QQQQ (the Nasdaq 100, and the IWM (the Russell 2000). There was no timing used in this scenario, it was strictly buy and hold.

Scenario 2- 80% of the money was put into the four equity ETFs in scenario 1 and the remaining 20% was put into three different bond ETFs. This scenario also used a buy-and-hold strategy.

Scenario 3- using the simple timing mechanism mentioned above, 80% of the portfolio was in the four equity ETFs and 20% in the bond ETFs until March 2008. At that time, the funds were reallocated to 30% in the four equity ETFs and 70% went into the three bond ETFs.

So how would you have fared using this strategy? Look at the chart below. Assuming a starting value of $1,000,000, at the end of 2008, your buy and hold strategy for stocks would have produced an overall gain of 14% and the buy and hold strategy with bonds and equities would have gained 19%. The clear winner was the one that used the timing mechanism. This strategy would have produced an overall gain of 52%.

Notice on the chart how Scenario 3 trails the other two ever so slightly for the first four years, loses ground in 2007, but saves you massive pain in 2008.

Getting back to the original theme, as a short-term trader, I would be playing the long side of this market for the next few weeks with an eye on the earnings season that will start in approximately three weeks. As a long-term investor, I would be dipping my toes in the water for now, but I would wait for confirmation of the 6-month moving average crossing back above the 12-month moving average before changing my asset allocation back to mostly equities.

Source: Simple Timing Tool That Will Help You Protect Your Assets

On February 4, I first warned that Google was running out of steam and about to drop.

Then on February 9 I said this.

Google might go up another week – but not pass its trend line resistance at $400 (if it passed $400, I would bail out of my short). It might try to get above, but should fail and drop to $275 or less by summer – a 31% fall.

A month later Google dropped to $289. You would’ve made a healthy 23% gain.

So I hope you pay attention to what I say next about Google Inc. (NASDAQ:GOOG).

What I want to show you is a little timing trick that relies on the 20- and 50-day moving averages.

Every time the 20-day crosses under the 50-day, you sell shares short. And when the 20-day rises above the 50-day, you buy shares outright.

By following this strategy, you would’ve made 43% when the first bearish cross happened in late June of 2008 until the beginning of this year.

Later, when a bullish cross happened (in early January) you would’ve recently sold out of that position roughly flat.

But today, another short-sale signal was triggered by this technique.

Here’s your suggested play: Sell Google short and use a point above the moving averages (like $340) as your stop loss to protect yourself.

If Google takes another leg down (as this very basic system shows it should), we could see Google shares trade for $250 per share.

If you’re looking at a weekly chart, the 30-week moving average (30 wma) will show the average weekly price for the last 30 weeks; the 50 week-moving average will show the average weekly price for the last 50 weeks; and so on.

On a daily chart, people will often look at the 20-, 50- and 200-day moving averages (20dma, 50dma, 200dma). Longer-term traders concentrate on the weekly charts and shorter-term traders will look at the daily, hourly and, in the some cases, even the minute charts. But if you want to be a truly idle investor, look at the weekly charts. In a bull market they will be sloping up. In a bear market they will be sloping down.

Below is a chart of gold since 2001. Most chartists tend to use rounder numbers and the 30 and 50-week averages will work just as well here. But, because I am stubborn old goat who always has to be different, I am using 34- and 52-week moving averages. (I use 34 as it is a Fibonacci number – that’s a story for another day – and 52 because there are 52 weeks in a year). You will notice that the 34 wma is above the 52 wma and the actual price is above the 34 wma. That is the action of a bull market.

You will also notice that the price tends to return to the 52wma; the 34- and 52wmas then come closer together, and then the price breaks out again. These mark good entry points. When the price is too far above its weekly moving average (30-40%), it’s usually a sign that it has got ahead of itself and it’s time to take some profits. You will also notice that the 34 wma has never crossed down through the 52 wma during this period.

Source: How to Make Money from Markets You Know Nothing About

That’s because DCT circles the market like a vulture. We wait for vulnerable stocks to show signs of failure at short-term highs, and then fully exploit their downside potential.

This “vulture” strategy is working pretty well so far. Year-to-date, Death Cross Trader has closed 10 out of 15 positions at a gain. That’s an accuracy rating of 66.7%!

On a cumulative basis — taking into account both winners and losers — you could have made gains of 243% during the first quarter of 2008 with Death Cross Trader.

If you average that over three months, it’s 81% gains per month, while the entire market fell!

We even managed to get a triple-digit winner, making 119% on the drop of FedEx Corporation (FDX:NYSE). Some other big moneymakers included 68% on Texas Instruments (TXN:NYSE) and a whopping 40% gains in only two days on AMR Corporation (AMR:NYSE).

Death Cross traders are loving it! And I mean that literally. Subscriber D.J. just wrote in to say, “I love your newsletter!”

Subscriber A.E. dropped me a note after our recent gains to say, “Amazing. Just using your service is making me money. Keep up the good work.”

And subscriber P.G. just made “a quick $800” on our last recommendation!

These are people just like you, making substantial gains by playing the downside of the market. And from the looks of it, the weakness in stocks is far from over…

While the markets have been rallying to kick off the second quarter, I suspect the enthusiasm could be shortlived. Technically, the name of the game is a final push toward the indexes’ 200-day moving averages.

This is a customary move in a falling market… Consider it a last chance to take any gains off of the table before the real drop starts.

There’s no doubt in my mind that we’ll continue to see a major breakdown in the market. My money is on Dow 10,216 (at least!), a Nasdaq valued at 1,750 and an S&P at 1065.

In that kind of climate, you better be holding some strong recession-proof stocks… or playing along with the successful downside positions you’ll find in Death Cross Trader.