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

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

• SPY -  56.8 (neutral)
• DIA - 78.4 (overbought)
• IWM - 37.8 (neutral)
• QQQQ - 60.0 (neutral)
• GLD - 34.8 (neutral)
• OIH - 62.2 (neutral)

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