Rally to start the 4th quarter – Short-term reprieve near?

The rally today pushed three out of the four major market indices into an overbought state. The Dow (DIA) and the tech-heavy Nasdaq 100 (QQQQ) are now in a very overbought state, which typically precedes a short-term (1-5 days) struggle for the bulls.

On a seasonal basis, Monday and Tuesday of this week are quite bullish. However, the bullishness ends quickly Wednesday and the short-term bearish seasonality carries us through the end of the week. History looks as though it could repeat itself this week. Certainly, another push higher tomorrow will put the major indices into an extreme state. If that occurs probability tells us that a short-term reprieve is anticipated. Furthermore with seasonality also pushing at the back of an already overbought state the probability of a fade lower increases that much more.

Playing a short-term fade while the market is in an overbought state is often a difficult endeavor. Oversold levels are far much easier to play. That being said, if the market pushes into an extreme state the probability of a fade of the current state increases dramatically. As I always say, probabilities are all we have as traders. Nothing is guaranteed in trading. We can only play the probabilities when they are in our favor and if the trade goes against us we must set specific money management guidelines for ourselves. Capital preservation is key!

Overbought/Oversold for October 1, 2007

S&P (SPY) - 76.4 (overbought)

Russell 2000 (IWM) - 68.6 (neutral)

Dow (DIA) - 86.5 (very overbought)

Nasdaq 100 (QQQQ) - 85.5 (very overbought)

Subscribers please check the Insider’s page of the website if you wish to check the overbought/oversold levels of the following 22 ETF’s: OIH, XLF, XLE, XLY, XLK, XLV, XLB, XLI, XLP, TTH, XLU, GLD, FXI, ILF, EZU, EWA, INP, UNG, DBA, DBB, DBE, and DBP.

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Andrew Crowder, Chief Investment Strategist, www.crowderinvestments.com