June 23, 2017

Short-Term Signals Reach Extremes

Our Tuesday top question was quickly answered today as the S&P and Dow continued the push to new highs. The Dow has been higher 13 out of the last 14 sessions and the S&P 9 out of 10. Both have been in “very overbought” territory for several days and our shortest-term proprietary indicators have reached an extreme.

Furthermore, a divergence among the major indices is signaling what could be a short-term top. The higher-beta Russell (IWM) and Nasdaq 100 (QQQQ) have struggled since the gap up Monday and have moved back into a neutral state. This is often a very good short-term indicator, particularly when the market is this overbought, that a short-term decline is not far off.

The most amazing aspect of the recent sharp move higher is it ability to push through several key overhead resistance levels without much hesitation. The move through the correction from 2/27 occurred with ease. The 1460 area of SPX -no pause. Lastly, the push through prior highs without a fight. Typically, the market will pause for consolidation at one of these levels and correct slightly but not this time. This has led to one of the best performing months in quite some time. April is on pace for the strongest performing month since November 2005 when the market gained 5.36% for the contract month.

Futures are down again after hours, but more important is the strong sell-off that occurred during the last half hour of the trading day. This could be the beginning of the short-term correction that we have anticipated since the gap up Monday. This could help out our Iron Condor strategy tremendously. At this point I will be happy with anything other than a max loss on the trade. Another reason why position sizing is so important and something that I will be discussing in detail in our next newsletter report (subscribers only). I would not be surprised to see the gap close by the close next Monday. The trading day after options expiration is notoriously weak especially if the current conditions hold.

Overbought/Oversold levels for April 18, 2007

  • SPY –  88.9 (very overbought)
  • DIA – 87.8 (very overbought)
  • IWM – 61.1 (neutral)
  • QQQQ – 66.8 (neutral)
  • GLD – 74.9 (overbought)
  • OIH – 48.8 (neutral)

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