Could Options Expiration Bring Two Trades?

As I write this all of the major benchmarks are down after hours. If this holds into the open tomorrow we should see the overbought levels in the major indexes move back to a neutral state.

What does this do for us? Well, it further sets up the potential for a trade in the Sector ETF Extremes strategy as well as a possible Gap Fade trade. I have to admit I was tempted to place a QQQQ trade, but was cautious due to the tech-heavy earnings reports that were due out. It would have worked brilliantly (that is if the market opens lower tomorrow), but I just didn’t think the risk/reward was good enough to risk any capital. I was hoping to see a gap up tomorrow and then fade the QQQQ at the open, but unfortunately in trading things do not often work out so perfectly.

So, this brings me to the Utilities sector (XLU). I am still sitting on the sidelines, but that could change quickly tomorrow depending on the price action of the underlying index. The shorter-term measures I use have pushed into a short-term extreme oversold state and a reading that is the second lowest in over a year.

XLE has also moved into a short-term oversold extreme and looks as though a sohrt-term reprieve is near. I would still like to see another push lower before considering a position and I prefer the IBB (very overbought) and XLU (very oversold) set up due to the nature of the short-term extremes. Hopefully tomorrow brings us a few trades.

Patience is a virtue in trading and during the lulls it is often difficult not be overly frustrated, especially id you are accustomed to trading frequently. I have often been compared to wood by my fellow traders and investment colleagues, but that is just fine with me. I judge myself on long-term returns and so far my methods have brought me and my strategies success. Lets just hope my good fortune continues. As we all know nothing is guaranteed in the world of trading. I let my performance speak for itself!

As an aside, I often visit the blog, Slope of Hope. I find Tim’s charts to be a wonderful complement to my overbought/oversold readings. The banter can be a bit much at times as there are a few knucklehead know-it-alls within the community, but that is easily overlooked given the quality of Tim’s analysis. Anyway if you get a chance check him out and notice his comments section. I recently started to offer the same comments section for my blog and would love to begin a similar community so I welcome any and all comments. It would be a great way to discuss the markets as I patiently wait for the next set up.

Have a great night!

Overbought/Oversold levels for July 17, 2008

ETF Extremes Options Strategy

* S&P 500 (SPY) - 54.9 (neutral)
* Dow Jones (DIA) - 65.0 (neutral)
* Russell 2000 (IWM) - 61.7 (neutral)
* NASDAQ 100 (QQQQ) - 61.4 (neutral)

Sector ETF Extremes Options Strategy

* Biotech (IBB) - 84.5 (very overbought)
* Consumer Discretionary (XLY) - 70.0 (overbought)
* Health Care (XLV) - 74.9 (overbought)
* Financial (XLF) - 62.7 (neutral)
* Energy (XLE) - 16.5 (very oversold)
* Industrial (XLI) - 61.3 (neutral)
* Materials (XLB) - 34.9 (neutral)
* Real Estate (IYR) - 62.7 (neutral)
* Retail (RTH) - 66.0 (oversold)
* Utilities (XLU) - 14.3 (very oversold)

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