Short-Term Overbought Again

Click on Chart to Enlarge

Click on Chart to Enlarge

Short-term breadth, momentum, and put/call ratios, are all at or very close to typically overbought extremes. We are currently at a slightly lower level than the last overbought signal from last Wednesday. I like to go with the longer term trend for short-term trades, which in this case I consider to be down. I also like to see successive overbought signals occurring at clearly lower price levels in order to enter bearish trades. Right now it is not clear that the highs from last week won't be exceeded, so I can't be sure that this signal is at a lower level yet.


The first chart above is the S&P 500. The blue circles and vertical lines indicate the 3 period RSI is over 80 while the 200 and 50 day moving averages are sloping down or flat. Several of those instances coincided with short-term overbought signals on the models I use for trades on the blog. Typically there was an immediate pullback of at least 3 days. Several instances also marked significant tops leading to major declines. Also the notes on the chart show the typical break of support after a bear market rally top, followed by very choppy rallies that barely held the highs of the initial rebound rally after breaking support. The light blue boxes outline the May and Sept. instances. We are set-up almost the exact same way right now. If the result is different this time, that would sound an alarm that maybe the market is changing character.


The next couple days will be key to see if the break above the downtrend line (blue line on yesterday's chart) from last September to this January is able to be decisively cleared or if today's close above that line will be just another whipsaw fakeout (which is my guess due to overbought extremes today).


I read a backtesting study this morning showing the short-term returns after a 1% up day the day before a Payroll Report (like today) with a gap up and higher close on the Payroll Day (like today). The three day returns are consistently negative with an average of -1.0% return. That is not a real big negative average, but the consistency coupled with short-term overbought readings makes for a pretty good bearish set-up in my mind.


Two other interesting pieces of data from today......


Despite a large up day, the volumes of the index ETF's (SPY, DIA, QQQQ) are much lower than yesterday. From past studies I have seen on this type of set-up, I believe this also has short-term bearish implications.




Also, despite the large up day today, the VIX only declined modestly and ended the day well off its morning lows forming a "hammer reversal" candlestick pattern in the process. I noted a similar occurence on the blog on Jan 2. That day marked the last real significant up day before that rally stalled and then gave way to 2 weeks of selling. See the second chart above for the VIX chart.


All in all, the short-term set-up looks pretty good for a bearish ETF trade, but I am going to hold back until we see what Monday morning brings. Any new short-term trade should be viewed completely independently of the current longer term trade on BGZ.