How to spot tops.

Here are just a few simple and reliable signs of a top:

First, insiders are selling at a furious pace and insider-buying has abated. The insiders are the smart money so this is a sign that stocks are high and ready for a reversal.

Next, the Volatility Index (the VIX, on the left of this page ) has collapsed from a high of 89 to the low 20s (recently). This means that fear has turned to complacency right as we approach the often dreaded month of October.

Finally, the record number of 72% bears hit in the AAII in March 2009 has turned into a high and rising number of bulls in the various investor polling services. The market psychology has gone from a depression in March to near euphoria as we close out September.

A manic market is about as healthy as a manic mental patient so be extremely careful in here. After the 47% rally in early 1930, people were singing “Happy days are here again.” That was right before the market plunged another 86% to hit the 1932 bottom.

Technical analysis can also be very helpful in spotting and timing market tops. The two best patterns to watch for are the head-and-shoulder tops and my favorite, the double tops.

Let's look at a couple recent double tops so we can be ready for the next one.

On May 2, 2008, the Dow Jones Industrial Average (DJIA) closed at 13,058 and then dipped to 12,745. On May 19, 2008, the DJIA went back up and touched the highs but closed at a lower low of 13,028, putting in a double top.

From there the market collapsed to 6626.94 at the March 2009 bottom. This was the 49% slow motion repeat crash that had a near identical price pattern to the famous 1929 48% crash.

As a side note, we've also just completed the near 50% (a favorate GANN number!) multi-month rally that happened in early 1930 right before an 86% plunge.

The most famous double top was Nasdaq 2000 at 5000. Nasdaq collapsed 35% in just two months after the double top was completed. In my next piece, I'll show some famous head-and-shoulder tops as that may be developing as I write.

In summary, it's not time to be a hero on the long side of the market. Yes, a close above 1065 on the S&P 500 would target 1120, the 50% retracement of the entire 2007-09 collapse. That's only about 5% upside from here versus the 86% potential downside if we continue to repeat the 1929-32 depression era move in stocks.

Some other warning signs of an imminent top are oil topping, copper topping, China topping, the Baltic dry index weakening, gold spiking and the fact that almost every talking head on TV is bullish! Remember, if your sell list is getting longer than your buy list, it's time to get shorter!