More Selling? Range-bound? Summer Doldrums?

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Now let me move to the news of the day.

Yesterday I stated the following:

Couple the difficulty sustaining post-fed gains with the current “overbought” to “very overbought” state of the major benchmarks and the extremely low reading in the “average true range” of the higher-beta Nasdaq 100 (QQQQ) and you can see why the probability of a short-term move to the downside is high.

The historical tendencies held true today and as a result the market sold-off. Our proprietary indicators have been spot on since we initiated our service. You can see this by looking at the performance and high win ratio of our ETF Extremes strategy. We do not have to tout our strategies all over the web as our performance speaks for itself.

Anyway, for the first time in close to a month the Dow has moved out of an “overbought” to “very overbought” state. All of the major market benchmarks that we follow are now back in a neutral state and nearing “oversold” territory. 

Furthermore, key areas of support were broken with ease and held in the benchmarks which means that we could see a continuation of the selling pressure that we witnessed today. I would not be surprised to see at least the higher-beta sectors (IWM and QQQQ) move into an oversold state before another rally attempt.  It certainly looks as though momentum has waned a bit, at least over the short-term (1-5 days) and more selling pressure is on the way, that is until an oversold state is reached.

Today’s action could also be the beginning of the “sell in May and Go away” theory that I mentioned last week. After the strong gains in the market YTD I would expect to see a range-bound market for several months and possibly throughout the summer. A range-bound environment would bode well for our SPX Short Iron Condor Strategy.

The old Wall Street adage reminds us that the worst six months of the year (May-October) have begun.

As I stated in my most recent newsletter issue, the Stock Trader’s Almanac states “A $10,000 investment compounded to $5444,323 during the November-April period over the last 56 years compared to a $272 loss for May-October. I think that sums up the significance of the historical period known as the “Summer Doldrums”.

Overbought/Oversold levels for May 10, 2007

• SPY -  40.9 (neutral)
• DIA - 53.5 (neutral)
• IWM - 37.4 (neutral)
• QQQQ - 38.3 (neutral)
• GLD -  24.4 (oversold)
• OIH - 39.3 (neutral)

We work hard to bring you our latest views, opinions and research on a daily basis. If you are a loyal reader and find our thoughts useful please show us your support by joining our newsletter service.  We currently follow 2 stock option strategies and one stock-based strategy in our investment newsletter. All of our strategies use the major benchmarks as the underlying. Furthermore, you will receive two free months of our investment newsletter when you purchase our White Paper. Check it out!

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Have a great night!

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