How long before the bears reappear?

The market managed to squeak out a small advance today. The advance over the last few trading days seems to be running out of steam. Our daily overbought/oversold readings on the major benchmarks (below) are currently in a neutral state, however, our shorter-term overbought/oversold measures are nearing an extreme state. Most likely if we do see additional gains in the major benchmarks over the next few days they will be limited.

Ideally, I would like to see the indices push higher into an “overbought” state as this would most likely signal a short-term bearish trade. I don’t think the bulls have enough room to push the indices into a ”very overbought” state which is typically what I like to see before entering a position.

Historically, options expiration and particularly the trading day after expiration have a weaker than average performance. The latter has been downright bearish over the last few years so we could see a similar outcome this time around if the set-up is right. Stay tuned, especially towards the latter part of the week, to see if a trade set-up for a post-expiration decline looks probable.  

Overbought/Oversold levels for March 12, 2007

• SPY - 54.0 (neutral)
• DIA - 55.3 (neutral)
• IWM - 54.7 (neutral)
• QQQQ - 53.4 (neutral)
• OIH - 65.6 (neutral)
• GLD - 44.0 (neutral)

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