July 28, 2017

False Breakout or Continued Upside Momentum?

We received the expected short-term bounce in QQQQ today and that brought the rest of the market up with it. The bounce in the tech-heavy Nasdaq 100 helped SPY breach strong overhead resistance levels which led to new highs in the broad market index. I did expect the QQQQ to move a little lower as I thought we could test “very oversold” levels before buyers decided to show some conviction. That was certainly not the case.

Breadth was also excellent in the higher-beta IWM and QQQQ. Overall an excellent day for the market. Now we need to concentrate on whether or not the move today was a false breakout. I have to admit I am a little nervous about the validity of the move today. QQQQ was at oversold levels not seen in quite some time so as I said earlier the bounce today was not out of the ordinary given the technical readings that were out there.

The sharp move today brought a few short-term bearish indicators to light. The sharp move brought SPY back into a precarious overbought position that is teetering on “very overbought”. A slight move to th upside will bring SPY into the aforementioned state intraday. This could happen at the open tomorrow with a nice upside gap in SPY which would most likely signal a trade in our Gap Fade strategy.

Furthermore, VIX once again fell to historically low levels closing the day below 10 at 9.89. As we have seen in the past when VIX reaches this type of level the market typically struggles on the upside over the short-term. This does not mean that we will not see a continuation of upside momentum, but I think if SPY moves into a “very overbought” state the market will, at best, pause for consolidation. If we do see a few days of sideways movement (tight range bound trading) I would expect to see a sharp short-term decline that ends the correction. Keep a close eye on the VIX.

Oversold/Overbought levels for January 24, 2007

  • SPY – 75.3 (overbought)
  • DIA – 69.4 (neutral)
  • IWM – 65.5 (neutral)
  • QQQQ – 53.8 (neutral)
  • OIH – 74.7 (overbought)
  • GLD – 79.3 (overbought)

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