August 24, 2017

Major Indices Nearing Extreme Overbought State

Both, Brazil (EWZ) and now Water (PHO) are in an extreme overbought state with RSI (2) of 99.1 and 98.3, respectively. I will be keeping a close eye on both over the next few days. The only concern for PHO is the large bid-ask spreads. When the bid-ask spread on $20 stock is $.20 to $.30 for the current month at-the-money strike I prefer to stay away and concentrate when more liquid issues hit extremes. I typically use oversold extremes on a less liquid issue if I am trying to build a position in stock for the intermediate to long-term.

The Dow (DIA), S&P 500 (SPY), Emerging Markets (EEM), Materials (XLB) and Energy (XLE) are all very close to an extreme overbought state.

If the Dow (DIA) or S&P (SPY) can move higher over the next day or two and as a result push the RSI (2) above 98 a signal will certainly be triggered in the strategy. It has been a stretch on the trading sidelines in the strategy so hopefully Mr. Market can cooperate.

A few days ago I pointed out that IBB has reached an extreme oversold state and the probability of at least a short-term bounce was probable.

On Friday the Biotech sector (IBB) had moved into an extreme oversold state with an RSI (2) of 1.6. The underlying stock moved from a low of 74.30 Friday and climbed to a high of 78.84 over the next two days. It would have made for a very nice trade indeed. The key is to wait until the RSI (2) hit the extremes that I have mentioned over the past few weeks.

Now we have the same extreme condition in EWZ and PHO except they are overbought rather than oversold like IBB. I will be watching closely to see how these two react over the next few days

I posted our proposed March Expiration Cycle SPX and RUT IRon Condors trades today on the Insiders page. We were able to get our stated prices early this morning when the market and IV (implied volatility) were a bit higher. As always I chose very wide ranges to increase the probability of our position. However, I sacrifice bringing in more premium as a result, but I am comfortable with that as I prefer a larger win ratio.

Overbought/Oversold for February 26, 2008

Major Benchmarks

  • Dow (DIA) – 77.0 (overbought)   
  • S&P (SPY) – 75.6 (overbought)
  • Russell 2000 (IWM) – 65.7 (neutral)
  • Nasdaq 100 (QQQQ) – 57.2 (neutral) 

more overbought/oversold levels on additional sectors found in the Insider’s page

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