Patience, Patience, Patience

Sitting on the sidelines is often the best course of action. Market action has been unseasonably strong and the talking heads have been hyping up new all-time highs in the Dow (DIA). We have all seen this before.  There is no denying the recent strength in the market, however, will the recent move be sustainable.

The S&P and Dow have moved further into overbought territory and are on the verge of moving into a “very overbought” situation. Another push higher and I will be tempted especially if we can get at least three of the indices into a “very overbought” state. We are hovering around a strong resistance area and the last two trading days of September are historically very weak. Add these and a few more short-term bearish indicators and it looks like another short-term reversal is in the cards.

This type of action has been typical recently and every time DIA and SPY reach this area they take a brief pause. The pause, whether in a “very overbought” state or a “very oversold” state, is where I like to step in because the probability of a sharp short-term move is very good. Of course, very good doesn’t mean 100% guaranteed, nothing is in the world of trading(investing) but with the odds stacked in our favor the risk/reward looks pretty nice. Couple this idea with appropriate money management and capital preservation techniques and your long-term success looks favorable.

RSI Wilder (5) for September 27, 2006

• SPY – 76.5 (overbought)
• DIA – 77.4 (overbought
• IWM – 62.1 (neutral)
• QQQQ – 69.8 (neutral)

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Andrew Crowder, Chief Investment Strategist