June 23, 2017

Overbought! Largest three day advance in months.

Immediately following the Fed announcement at 2:15 EST the market surged higher which pushed all of the major benchmarks into an “overbought” to “very overbought state”. Typically, when the market moves sharply in one direction it is often reversed within a few days. Given the the current overbought levels and the fact that the shorter-term levels I follow are in an extreme state I would expect to see a decline over the next few days. The question is will the expected short-term decline wipe out today’s gains? I tend to doubt it, at least over the short-term, but stranger things have happened.

The extreme short-term overbought situation should make for an interesting short-term set-up especially if I see a small advance over the coming days. The probability of a decline looks good over the next few days so I might consider stepping in for a short-term play at this juncture.

The three day rally has really put the SPX Short Iron Condor strategy in a bind. I chose a 140 point range which allowed for a 5% move (70 points) each way but with SPX gaining 50 points in three days during the first week of our trade I could be forced to make some adjustments in the near future. This is the largest three day advance in quite some time. If this occurred during the third our fourth week the strategy would be okay, but given that this is the first week of the April cycle this could lead to a loss. Sharp directional moves are the worst scenario for the Iron Condor strategy, particularly during the first week. As I stated earlier, I expect to see a decline over the coming days due to the overbought nature of the market and if there is any upside it should be limited and not sustainable. But as we all know, this is Mr. Market we are talking about and even though probability is on your side there are never any guarantees in trading/investing.But we all know that already.

Overbought/Oversold levels for March 21, 2007

  • SPY – 78.7 (overbought)
  • DIA – 75.2 (overbought)
  • IWM – 76.2 (overbought)
  • QQQQ – 80.2 (very overbought)
  • OIH – 71.5 (overbought)
  • GLD – 77.6 (overbought)

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