No matter how experienced you think you are at some point the market will offer you a lesson and it’s up to you to learn from it or not. In this weekend’s update I want to share with you a big lesson I learned from this monster rally that we just witnessed and maybe you find it useful.

In context: We had traded long hard into the October bottom and even saw a new high coming in the 2007 structure. The context of the larger megaphone pattern made a tag of the upper trend line a likely eventual target. What stumped pretty much everyone in this rally is the fact that this monster never had a real down day or any retracement of any sort. It had a few flat closes, but that’s it, it went straight up without a break resulting in a speed and size gain very reminiscent of what markets experienced during the year 2000 bubble.

While fast and bullish bounce action is to be expected in oversold markets like the one we saw in October, the one component that surprised was the ferocity with which central bankers responded to the weak market action and economic data. The truth is central bankers trapped many traders, either short or not long enough. The chart speaks for itself:

I’m being half facetious here with the mentions of Draghi, but reality is the constant barrage of jawboning not only by him, but also US central bankers who are giving speeches at a clip of 2-4 a day, have provided a constant source of algo boost action mostly expressed via overnight futures buy programs that have resulted in new highs almost exclusively driven by gap ups. October 31 and November 21 are standing out as the prime examples.

No whining or sniveling, this is the unique market environment we find ourselves in and one can argue the merits of central bank action all day long, but at the end of the day you have to ask yourself: Do you want to be right or do you want to make money?

But here’s the key lesson I want to share with you before I move on to the detailed chart update:

By virtue of being married to the best chartist I know (Mella_TA) I sat on a gold mine of a steady technical charting perspective that had totally called this move from beginning to end.

In the context of the dates of the $DIA chart above I want to share with you her charts from our member stream as they happened as they show the absolutely steadiness of her calls and no news, central bank chatter or otherwise influenced her KISS (keep it simple stupid) technical calls. The tweets are telling a magnificent story and speak for themselves. Just look at the dates and remember the price action of these days:

And finally KISS:

I’m not just saying this because she’s my wife and partner here at NorthmanTrader, but this is just charting brilliance. From 1820 to 2075, outlining a technical target and commenting on the action throughout with a steady hand. It was all there, every step of the way. Choo choo indeed.

For me the big lesson here is this: While it’s fine to day trade the action in between and even want to trade for retrace movements, going forward for me I’ll always have a core swing position to let run into Mella’s target zone on the big swing calls. I didn’t do that this time and took profits way too soon and boy what a trade that would have been.

KISS. Keep it simple stupid.

Now in my mind central bankers accelerated the reaching of this technical target and were principally responsible for making this trade more difficult than it should have been. Even the bubble insanity of 2000 came with down days and breathing. Not this monster. But it is the reaching of the technical target and the patience to let it get there that makes for a great swing trade. Did this get there faster than even Mella expected? Sure. But the how it got there is secondary to the fact that it did.

Now that the target zone has been reached what do the readings tell us?

As far as I can tell we are at a crossroads here of sorts. One thing that should be completely clear here is that central banks are not pulling back and have accelerated their global efforts. In the summer we were all looking toward the potential impact of QE3 ending. Within days QE3 was replaced by QE efforts by other central banks. The net result: Money supply keeps increasing and this is apparently not changing unless something breaks in the construct they have created.

This week’s new M1 money supply data then confirms the natural consequence of new highs:

As we are now historically overbought on many levels we can still expect a pullback of some sort the only question being how much of a pullback and when as the year 2000 and even 2007 scenarios looms large.

Remember the context. RSI and MACD readings are through the roof:

Some stocks have barely corrected in weeks, months or even years. Example LUV:

These are exponential market cap increases in some stocks that simply do not have an exponential business model. Flying from Phoenix to Vegas and back 20 times a day, as in the case of Southwest Airlines, is just not an exponential business model. I know I’m being facetious here, but you get my drift.

And the tech sector, pushed on by $AAPL and a few other select mega cap stocks is pushing against its bubble highs of 2000 with a monthly RSI reading north of 82:

Yet as I keep pointing out: The underlying structure is weak, weak, weak. Take the above mentioned $NDX:

One could argue we basically retested the previous upper trend line, but have have not even recaptured the previously broken lower trend line. And yet we find ourselves very close to a MACD crossover all the while accompanied by weakening internals.

In fact the high/lows, while driven higher by Friday’s gap up still reflect an ever weakening picture from high to high:

Speaking of the $SPX the percentage of stocks trading above the 50MA are now screaming caution as well:

And despite the central bank induced gap ups the $IWM hasn’t gone anywhere in 4 weeks:

No, there are clearly issues here with this rally. The weekly $SPX trend remains intact, but warning signs keep screaming caution. Look at the money flow:

While the 2011 case shows a similar structure I keep also noting the 2007 structure as I had noted it back in October as a potential guidepost which has now played out. This last week’s weekly close continues to point to a strong similarity:

None of this makes me a raging bear here, but I’m keenly aware of the warning signs and a similar play to 2000 could still make for explosive new highs, but these charts tell me to be very opportunistic in my trading.

We are entering the final weeks of trading in 2014. Most will delay selling winners until next year for tax purposes. In addition to all the overbought readings the $VIX suggests one more sign of life before the end of the year:

But I don’t plan to be too comfortable on the short side here. After all I’ve learned my lesson. Don’t fade the KISS 😉

For more information about our trade philosophy or on how to become a member please visit the About and Membership pages.