Back in an Overbought State

Another push higher today moved the market (other than the NASDAQ 100 – QQQQ) into overbought territory. Typically, when we reach this type of extreme we know that the market struggles to move much higher over the short-term (1-5 days). I would feel more confident about a short-term decline if the market gapped higher or simply just moved into a very overbought state. Furthermore, I would like to see QQQQ join in the fun. If the NASDAQ 100 reaches an overbought state I might be tempted to fade the most overbought of the 4 major indices (SPY, DIA, IWM, QQQQ). Currently, it looks as though IWM is the underlying of choice, but we all know how quickly that can change.

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Overbought/Oversold levels for February 1, 2007

• SPY - 75.9 (overbought)
• DIA - 76.3 (overbought)
• IWM - 78.9 (overbought)
• QQQQ - 59.2 (neutral)
• OIH -68.2 (neutral)
• GLD - 81.0 (very overbought)

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