August 19, 2017

Short-Term High-Probability, Mean-Reversion Indicator. Several ETFs Hit Extreme Readings.

The QQQQ trade in the High-Probability, Mean-Reversion strategy continues to look good. The Q’s finished the day slightly lower which could be a telling sign over the short-term. With SPY and DIA in a short-term “very overbought” state, Mr. Probability is telling us that a short-term reprieve looks likely. Both of the high-liquid ETFs have an RSI (2) that exceeds 99.0 which is a rare event. The last two times we have seen readings like this the market moved lower. However, we also witnessed an occasion earlier in the year, the 3/5 gap to be exact, where the market rallied for several weeks and pushed the RSI levels to astronomical levels. The former looks more probable, but as always, I will keep my stops at a reasonable level just in case QQQQ decides to rally further into short-term overbought territory.

We are indeed experiencing strange times in the market. The market closed higher for the fifth straight day, yet the NYSE TICK, made record lows. The TICk closed the day well below -4000 which is the lowest reading while the major market benchmark, S&P closed higher. In the past when this type of price action occurred the major indice was lower over 25% of the time one month later with a return below 2%.

As I stated yesterday,  over the short-term the bears look like they should have the edge even with the S&P making new highs for the fifth straight session. During the recent advance breadth has been surprisingly low, less than 2 to 1 positive. Typically when this type of price action occurs we will see a decent decline going forward. Actually when digging a little further, when this type of price action and breadth occurred in the past the S&P had a -2.2% return one month later. The last two times this occurred the market moved over 6.5% lower. I am not certain that we will see this type of move occur going forward, but if the market does happen to move lower I would not be surprised to see the 12/1 gap fill which would be $52.42 in the Q’s.

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Short-Term High-Probability, Mean-Reversion Indicator – as of close 12/14/10

Benchmark ETFs

* S&P 500 (SPY) – 99.3 (very overbought) / RSI (2) – 99.3
* Dow Jones (DIA) –84.6 (very overbought) / RSI (2) – 99.4
* Russell 2000 (IWM) – 75.0 (overbought)

* NASDAQ 100 (QQQQ) – 71.6 (overbought)

Sector ETFs

* Biotech (IBB) – 76.9 (overbought)
* Consumer Discretionary (XLY) – 58.7 (neutral)
* Health Care (XLV) – 84.5 (very overbought)
* Financial (XLF) – 68.1 (neutral)
* Energy (XLE) – 66.9 (neutral)
* Gold Miners (GDX) – 59.5 (neutral)
* Industrial (XLI) – 88.8 (very overbought)
* Materials (XLB) – 75.5 (overbought)
* Real Estate (IYR) – 38.7 (neutral)
* Retail (RTH) – 50.3 (neutral)
* Semiconductor (SMH) – 55.0 (neutral)
* United States Oil Fund (USO) – 60.9 (neutral)
* Utilities (XLU) – 70.0 (neutral)

International ETFs

* Brazil (EWZ) – 58.0 (neutral)
* China 25 (FXI) – 49.0 (neutral)
* EAFE (EFA) – 79.2 (overbought)
* South Korea (EWY) – 80.6 (overbought)

Commodity ETFs

* Gold (GLD) – 55.7 (neutral)

Ultra Extremes

* Small Cap Bear 3x (TZA) – 23.4 (oversold)
* Small-Cap Bull 3x (TNA) – 76.0 (overbought)
* UltraLong QQQQ (QLD) – 71.0 (overbought)
* Ultra Long S&P 500 (SSO) – 85.2 (very overbought) / RSI (2) – 99.2
* Ultra Short S&P 500 (SDS) – 14.9 (very oversold) / RSI (2) – 0.8
* UltraShort 20+ Treasury (TBT) – 74.7 (overbought)

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