July 28, 2017

Short-term bias leans towards the bears

The S&P experienced the best one week performance since March 2003. After a nice rally Monday-Wednesday, the market was unable to continue the surge higher during the last two trading days of the week and as a result traded in a very tight range.

As I have stated many times in the past, this type of price action (substantial advance followed by tight range-bound price action) typically leads to a short-term reprieve particularly  when the market is in an extreme overbought state. Furthermore, the longer the indices remain in a tight range the shaper the move outside of the range and given that the upside looks limited due to the overbought levels I expect to see a short-term move lower towards the beginning of next week. Not much has changed over the last few days.

Also, as I have stated the last few days (and several times in the past) the initial move following a fed release is usually reversed within a few days particularly if the move was greater than 0.5% in the S&P. When I combine all of the elements mentioned above I can’t help but have a short-term bearish bias. Once the market is able to work off the current overbought levels I will reevaluate my stance, but until then I think the short-term bias leans towards the bears.

Overbought/Oversold levels for March 23, 2007

  • SPY – 78.2 (overbought)
  • DIA – 78.1 (overbought)
  • IWM – 74.0 (overbought)
  • QQQQ – 67.3 (neutral)
  • OIH – 80.4 (very overbought)
  • GLD – 53.1 (neutral)

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