August 17, 2017

Be aware of a potential false breakout

The market continued to rally today and has pushed the major indices near an overbought state. Our shorter-term overbought/oversold measures are nearing an extreme so more than likely we will see a short-term decline or pause very soon. As I stated yesterday the 141 level of SPY (1410 on the SPX) should prove to be an important area of resistance. So far the market has held up quite nicely, but I think the move could be overextended.

The fed announcement is due out tomorrow so be prepared for some volatility. Typically, any sharp directional move after the announcement is reversed within days so be careful for false breakouts particularly if we see a sharp move to the upside.

The VIX dropped another $1.32 today so premium is once again hard to come by. This certainly helps out our SPX iron condor position and moreover,  we are still comfortably situated 50 points from our short call position. Given the near overbought levels I expect to see SPX move back towards our midpoint over the coming days. Unfortunately, I do not have a crystal ball so there are no certainties, but probability is on our side. If the underlying SPX continues to push higher in the face of overbought conditions I will start looking at potential adjustments, but we are currently well within our chosen range so we are not yet concerned.

Overbought/Oversold levels for March 20, 2007

  • SPY – 66.1 (neutral)
  • DIA – 62.9 (neutral)
  • IWM – 64.4 (neutral)
  • QQQQ – 67.7 (neutral)
  • OIH – 58.7 (neutral)
  • GLD – 70.2 (overbought)

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