Home Business News Alessio Rastani: Stocks have reached the “Danger Zone”

Alessio Rastani: Stocks have reached the “Danger Zone”

6th Nov 13 7:59 pm

Remember the trader who told the BBC that “Goldman Sachs rules the world”? This is his column

Our columnist Alessio Rastani is the self-proclaimed trader who shocked the world by declaring live on BBC News that he goes to bed “every night dreaming of the next recession” and that “Goldman Sachs, not the governments, rule the world”. He’s a controversial figure, not least because he’s a self-taught non-institutional trader with no FSA license. But he certainly isn’t shy about sharing his views. Do you agree with his words? (His words are his own and not endorsed by LondonlovesBusiness.com.)

October was a great month for the stock market.

Even though historically October has tended to be a negative month for stocks, the S&P 500 is up 7% and the FTSE is up 6% from the lows in October.

However, based on historical patterns, we are about to see a major top in stocks and the start of a sell-off that could last until December.

Take a look at this chart of our barometer which measures the percentage of stocks that are above their 50 daily moving average (DMA):

Alessio Rastani - column 1

When the barometer goes above the 80% level this shows that more than 80% of stocks in the S&P are above their 50 DMA. This means that stock are overbought and investors should be cautious.

However, the “sell signal” only appears when the barometer closes below its 80% level again (notice the red circles).

Take a look at what the stock market did every time the barometer closed below its 80% level:

Alessio Rastani - column 2

You will notice that apart from the whipsaw (false signal) in July, our barometer has produced reliable sell signals 4 times since April.

UK Stocks did exactly the same thing.  See this chart of the FTSE 100:

Alessio Rastani - column 3

We are now in the “danger zone”.  Our barometer is exactly at 80%. A close below the 80% level this week could trigger a sell-off in stocks that could last till December.

Investors should look at taking profits and getting prepared to short stocks once the signal is given. 1680 could be our next target on the S&P and 6500 on the FTSE.

Alessio Rastani is a stock market trader at LeadingTrader.com

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