Short-term Reading States Reprieve is Near

The Dow has pushed above 10,000 for the first time since October 8th of last year. With the strong rally comes a short-term “very overbought” state which typically means a reprieve (1-3 days) is right around the corner.

When I look further at the other major market indices I notice that the Nasdaq 100 (QQQQ) is also in a n overbought state, but the Wilder RSI (2) (a short-term overbought/oversold measure) is pinned at 99.5, one of its highest historical readings. This is a powerful signal and one that states a fade is in the near future (1-3 days). While I think we will see a decent move to the downside immediately following options expiration (the day after), I think we might just see a smaller move to the downside tomorrow or Friday.

All we have as traders, market participants is probability and on a short-term basis the probability of a short-term move lower is overwhelmingly showing a decline.

Could we see our first trade in our ETF Extremes Strategy since early February? It certainly looks that way, particularly if the market opens higher tomorrow.

I am still working on my book and will hopefully have it available in the next few weeks. Cross your fingers!

Overbought-Oversold levels for October 14, 2009

ETF Extremes Options Trading Strategy

* S&P 500 (SPY) – 82.3 (very overbought)
* Dow Jones (DIA) – 84.2  (very overbought)
* Russell 2000 (IWM) – 76.8 (overbought)
* NASDAQ 100 (QQQQ) – 82.9 (very overbought)

Other ETFs

* Ultra Long (SSO) – 82.8 (overbought)
* Ultra Short (SDS) – 17.6 (very oversold)