The mania and the correction

<p>In the last few weeks we have seen many indicators flashing the same warning, a trend reversal or sharp sell off is imminent. Of course this does not mean the sell off will happen now or tomorrow, sometimes and in particular during a mania, the expected sell off can take longer to materialise. I know because I have already seen it, for example take a look at the S&amp;P 500 in September last year.</p>
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<p><a href="https://www.bettertrader.co.uk/.a/6a0162ff9ddd58970d027880265db1200d-pi"><img alt="SPX210428" border="0" src="https://www.bettertrader.co.uk/.a/6a0162ff9ddd58970d027880265db1200d-800wi" title="SPX210428" /></a></p>
<p>The S&amp;P 500 rally during July-August 2020 was without interruption, similar to today's rally. The S&amp;P 500 was in a mania and overbought but kept going up until…it dropped 10% suddenly. Look at the RSI at the bottom of the chart, it was overbought for two months prior to the sell off. Normally, in a normal situation the market corrects after the RSI is overbought. If the correction is deep the RSI can become oversold, then a new wave up starts. A similar situation is happening today, the momentum indicators have been overbought for a while yet the S&amp;P is still rallying.</p>
<p>The more the market rallies the less upside there is, at the same time the downside is increasing. This means buying the indices at these levels does not offer a good risk/reward. If history is any guide, there will be a significant decline before the rally resumes. What you want is a good risk/reward trade with plenty of upside. We are waiting.</p>