A “good” overbought market?

Mid-week trading update: Last weekend, I pointed to the analysis by Simon Maierhofer, writing in Marketwatch, who highlighted a bullish “kickoff” signal in which the SPX rose for 1.5% or more for three consecutive days (see The market 2-step: 1 forward, 1 back). Such “kickoff” signals have seen higher stock prices 12 months later. So far, the market is roughly acting according to that script.


An overbought market

Two weeks after that “kickoff” signal, the market is overbought, which should be a cautionary sign for traders. However, such overbought conditions may be the start of a series of “good” overbought signals that accompany bullish thrusts. As the SPX approaches key resistance at about the 2000 level, the key test for the bulls is how stocks behave at these levels.

As the chart below of the SPX indicates, the market is overbought on the 5-day RSI. Moreover, TRIN closed at 0.41, which is another sign of an overbought reading. The vertical lines indicate instances in the past year when TRIN has fallen below 0.5. History shows that stock prices have either pulled back or moved sideways for 2-3 days.

This chart from IndexIndicators also shows that short-term breadth appears to be extended:

Further, Urban Carmel wrote about the overbought condition shown by the NYSE McClellan Oscillator, which closed above 90 yesterday.

His conclusion was similar to mine. Momentum is positive, but prepare for short-term weakness:

SPY should be weak the next day or longer. If it instead rises further, it will likely give those gains back in the next week or so. It would be normal for SPY to trade at least 1% below today’s close in the days ahead. A loss of 3% or more would not be unusual.

The upward momentum – both price and breadth – in SPY implies a “higher high” within the current rebound is likely still ahead.

Stocks are likely to either pull back or consolidate their gains in the next couple of days. My inner trader covered his small SPX short position today. He is in cash and waiting for a suitable pullback in order to get long.

14 thoughts on “A “good” overbought market?

  1. Thanks for the email alert on SPXU, Cam and also for this current analysis of “good” overbought. Very helpful indeed. Thank you!

  2. So why did you cover the short when probabilities point to a short term correction?

  3. Cam- Thanks for the e-mail update on your trade (covering the short and taking a long position). I do not see in your tweet ( referenced in the e-mail) that you took a long position. Perhaps I am missing something? Thank you!

    1. I did not go long. The first email notice had a typo. It was corrected in the second email.

  4. Cam – In your blog on 2/28 your trade position switched to bullish and the arrow was pointing up on the chart. I now read that just today you covered your short position and are in cash. Seems like a mixed message. As a subscriber to your blog do I have to follow your tweets also? And if your trader turned bullish, why are you in cash?

    1. Note I wrote on the weekend that “my inner trader” was unable to react because I changed the signal after the close on Friday. I was looking to opportunistically cover my short this week, which I did.

    1. I don’t use StockCharts.com , but, I use Worden Bros. and on their system the ZBT did not happen within 10 TD’s.

    2. That looks like an error in their code. I have a call into their tech support to confirm. It took 12 days for the ZBT Indicator to achieve its objective, which is longer than the prescribed 10 day window.

  5. Re: Kickoff – Excellent chart !
    Comment – except for 1970 & 2016, each of the other Kickoffs occurred in the last six months of the year. 1970 did occur during the last seven months of the year. So for 2016, there is time for a retest of the Jan/Feb2016 lows to be tested. These retests have occurred in some of the Kickoff years noted. In Election years, it is common for a mid year pullback and then a rally in the second half of the year. Based on both the Kickoff data & the Average Election Year Pattern, the door is open for a possible higher market in the second half of 2016.

  6. I agree with the charts,but..i think the jobs report will pull the SPY above 200.I am buying spy 198 calls that expire on 3/18…i will buy more of them if the market sells off this afternoon.

  7. Cam- Thank you so much for the gift you have just given your existing subscribers. I am reasonably sure I speak for others when I express gratitude to you. Thank you for dancing with the ones that brung you!

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