The market closes at an important juncture

July 28, 2006 · Print This Article

I would like to reiterate what I stated yesterday in the blog as our feed was temporarily disabled. If you happened to read yesterday’s post we apologize for the inconvenience and you should probably skip to the new information. We stated the following yesterday: After several months without a signal we resumed our profitable ways in the ETF Extremes strategy. We made 13.3% on the trade in just over a week and are now up 23.9% YTD. We have stated several times over the past few months that we were not going to be pressured into a trade in our ETF Extremes strategy. Patience and discipline are the key ingredients to the success of this strategy and forcing a trade is, in most cases, detrimental to any strategy. Our exact words on the website: “This strategy requires patience coupled with a disciplined approach. The strategy will make approximately, on average 1 to 3 recommendations a month with holding periods of 1 to 15 days, however, there will be some months when no recommendations are made. The key to this strategy is patience. Waiting for the appropriate scenario to recommend trades with a high probability of success is what makes this strategy a success.” After several months without a signal many of you seemed impatient. Believe me, we would love to have potentially profitable signals on a daily basis, but that just isn’t reasonable with this strategy. We will never make apologies for our system and why should we, with a win ratio of 100% YTD and gains of 23.9% YTD we feel confident in the strategy and its ability to produce long-term returns. While we were sitting on the sidelines for the last few months the market was experiencing an absolutely horrible 2nd quarter. It goes to show that sometimes sitting on the sidelines is the best trade.

Now lets move on to today’s commentary. The market (S&P) closed right below 1280 today. I have mentioned over the last few days how 1280 is an important resistance level and should give us a clue as to where the market is headed over the intermediate-term. If the S&P can move above this level and hold this should increase bullish sentiment going forward. However, this will not be an easy task as there are a few troubling hurdles that the market must overcome to continue this rally. First, the S&P and Dow are officially in an overbought state and moving ever so closer to very overbought. In most cases this is a signal that a short-term decline is not far off especially if we make it to very overbought. Another is the tech-heeavy QQQQ and IWM. Normally, both will lead the charge in a bullish market and this just hasn’t been the case over the last few weeks. If the market happens to move sharply upward Monday we should expect to see at least a pause going into mid-week. The beginning of the week is seasonally bullish so this would not be out of the ordinary. Although, given the current overbought status of the market I am a little hesitant about the sustainability of any move upwards at this juncture. So, going back to what I stated earlier, keep a close eye Monday on how the market reacts to the 1280 level of the S&P. This should give us some much needed insight for the weeks ahead. Take care and have a wonderful weekend.

RSI Wilder (5) for July 28, 2006