Short-term Play? Overhead Resistance Looks Formidable and Upcoming Jobs Report.

May 2, 2007

The market bounced back to the recent highs established on 4/25 this morning and then began to consolidate around that area. The overhead resistance looks formidable at this juncture. Since reaching this area the S&P (SPY) has struggled to push higher and with the major benchmark once again near an overbought state it could possibly fail this time around, at least over the short-term (1-5 days).

On a seasonal basis the next couple of days are slightly weaker historically with Friday being the weakest. Since 1950 the S&P has only finished higher 23.8% of the time on the fourth trading day.

seasonality alone is (in almost every case) not a reason to place a trade. However, when compared with the current state of the market at the time the seasonal tendency arrives, the probability of a successful trade can be increased tremendously. Always be aware of the market’s seasonal picture.

If the market is able is to hold at its current level tomorrow there could be a good opportunity for a short-term play. However, the market-moving unemployment report is due out before the bell Friday so taking a position Thursday afternoon is risky. The safer play would be to fade the open if it is indeed higher at the open, especially if the S&P gaps at the open. Either way, as I am sure all of you know there are no guarantees in trading/investing so be nimble when trading over the short-term.

Over the past year this type of action (gap open) has occurred roughly 50% of the time. When it does occur the return a week later is approximately -1.2%.

If the market opens significantly lower I am not going to chase the move as the probability just isn’t there for my style of trading. Remember, opportunities are made up easier than losses. So if you let a few pass you by don’t dwell on what could have been. There will always be more opportunities around the corner.

Overbought/Oversold levels for May 2, 2007

SPY - 68.6 (neutral)
DIA - 84.4 (very overbought)
IWM - 55.1 (neutral)
QQQQ - 68.9 (neutral)
GLD - 34.3 (neutral)
OIH - 69.7 (neutral)

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Dow in Overbought State Since 4/13 and the Continued Success of the ETF Extremes Strategy

May 1, 2007

The Dow (DIA) extended its gains again today and is once again very close to a “very overbought” state. It has remained in an overbought state since 4/13. Furthermore, it has traded in a tight range for the last four days near the recent historical highs. I expect to see much of the same over the next few days, that is until the jobs report is released.

If the Dow is able to hold the recent gains I would expect to see some weakness on Friday regardless of the report. Why? Historically, the Friday of the first week of May is extremely bearish with the Dow and S&P trading higher only 38.1% and 23.8% of the time.

Seasonality alone is (in almost every case) not a reason to place a trade. However, when compared with the current state of the market at the time the seasonal tendency arrives, the probability of a successful trade can be increased tremendously. Always be aware of the market’s seasonal picture.

Over the course of the next few weeks I will be playing around with different allocation (position sizing) methods. Many of my subscribers have reported gains in excess of 200% with the ETF Extremes which is why many of you have asked why we choose to report our performance based on a fixed number (10) of contracts.

Even with the performance based on a fixed number of contracts the sample portfolio is currently worth $7,265, or 45.3% (including commissions) since its inception (1/06). The win ratio in the strategy currently stands at 92.3%, 12 out of 13, on our site for further details).

We will continue to patiently wait for opportunities to arise and only trade scenarios where the probability is overwhelmingly on our side. Couple this approach with sound risk management and you can see why we have been able to beat the major benchmarks by a substantial margin.

Overbought/Oversold levels for May 1, 2007