July 28, 2017

The Answer – False Breakout!

The answer to yesterday’s post, “False Breakout, or Continued Upside Momentum” became quite obvious today. The bears came in at the opening bell with a heavy hand which ultimately resulted in the largest decline for the major benchmarks in over two months.

I mentioned yesterday how I was nervous about the validity of the sharp upside move yesterday. The cause for my concern, SPY was in a precarious “very overbought” state and the VIX fell to a historically low level at 9.89. Well, the VIX jumped 13.5% to 11.22 today and could jump even higher over the coming days. The futures are lower as I write this and quick sharp reversal like we saw today often lead to continued downside over the short-term. As you can see below major indices are once again nearing an oversold level which should bring buyers back in but history tells us that the bounce could be temporary.

The market has witnessed three similar situations in the past (new 52-week high followed by a sharp decline that exceeds 1%) and each time the market was weaker over the short-term. As I stated before, I expect to see history repeat itself. The next week or so should be very interesting. Moves like today often lead to intermediate-term weakness (several months) so be nimble. Furthermore, also keep an eye on rising crude prices and bond yields. Both of these spell trouble for the market going forward.  

Oversold/Overbought levels for January 25, 2007

  • SPY – 43.3 (neutral)
  • DIA – 43.8 (neutral)
  • IWM – 46.9 (neutral)
  • QQQQ – 39.4 (neutral)
  • OIH – 52.3 (neutral)
  • GLD – 70.9 (overbought)

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