We’re Short-Term Overbought

The Market

Now that we’re done with the rebalancing and expiration for the quarter, there are questions as to whether or not we return to the trend that was in place prior to last week. My sense is it is too soon for that. That’s because the indicators are still not yet at a maximum overbought yet. Oh sure, the same as last Thursday evening, we are very short-term overbought but not yet at a full ‘maximum’ situation. It’s a bit early to say when that will be but my initial notes say about one more week, which makes the timing interesting because that takes us right through the end of the quarter.

So we’ve got a very short-term overbought situation. The McClellan Summation Index, which is now very much heading upward, needs a net differential of negative 4,200 advancers minus decliners to halt the rise and that makes it short-term overbought. My own Oscillator says a pullback should lead to another rally before it moves to an overbought condition.

But we did finally get some movement, real movement, in sentiment on Friday. I know because the put/call ratio sunk to 0.78, the lowest reading in two months. The 10-day moving average hasn’t fallen much, but the one-day reading tells us folks are moseying over to the fence that divides the bears from the bulls.

Even the 21-day moving average of the put/call ratio for ETFs has rolled over now, enough that you can see it. And that particular ratio hasn’t had a reading under 1.0 since late January.

It’s time to discuss the 50-day moving average line though. As you go through your charts, you will notice some stocks and/or indexes are coming up through that well-watched moving average line. I like to look back and see when 50 trading days ago was, and in this case it was the second week of January. The reason I do this is to see what sort of prices the moving average will be dropping and if we drop lower prices (than where we are now) the moving average will curl under and rise. Let’s look at the chart of the iShares Russell 2000 ETF (IWM) to analyze it.

The blue circle shows you where the market was 50 trading days ago. So we’re dropping higher prices, correct? That means the line should continue down. But wait, look at how fast the market came down from there. That means within two weeks we could be replacing lower prices with higher prices. To me that is why it is now important that in the case of IWM sell offs hold over (approximately) last week’s low. That’s because last week’s low was similar to late January. The preference is that 200-ish holds because that is not far from where the current moving average line is.

Moving average lines that are rising and/or flat or are curling under will offer better support on pullbacks/declines than moving average lines that are still heading down. Notice I have said very little about all that resistance that resides at 210 and higher on the IWM. It should work as resistance and like all resistance it will need to be eaten through and that takes time. Just think of folks who feel like if IWM ever gets back to 210 or 215 or 220, etc. they will get back to even and sell. That’s how resistance works. Like a giant sandwich it must be taken one small bite at a time. And sometimes you have to put the sandwich down and save it for another time.

New Ideas

I am still waiting for Dow Holdings (DOW) to break out of this base. My patience is wearing thin!

Today’s Indicator

The new highs are lagging but that’s to be expected coming off a low. New lows, though contracted yet again. Nasdaq had a reading under 100 for the first time since January. The 10-day moving average of new lows is heading down now.

Q&A/Reader’s Feedback

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I am not a big fan of energy in general still (I think it needs to do some more work), but I was asked about Valero (VLO) which broke out of a big base a few months ago and has stalled at the $90 area. That base measures to $100-ish and the 90/100 rule applies (90% of the stocks that make it to $90 will make it to $100) so I think this sideways action for the last six to eight weeks ought to resolve to the upside. A stop is too far away at under $80 though.

Microsoft (MSFT:Nasdaq) is one of those charts with a lot of resistance to eat through. The downtrend line has been crossed (barely) but you can see the blue lines are resistance areas and that is going to take a lot of bites (time) to eat through. If it can eat through it in the manner I’ve drawn in red, then it improves. If it simply just chops around in between the blue lines then my guess is once the market is geared up for another decline, Microsoft goes down with it. Going sideways in the lines is a stock that is losing momentum. Making progress (with higher lows and higher highs) is better because it is building momentum.

Twitter (TWTR) is trying to form a very small bottom. There isn’t even a clear level that if it gets through it can make a move because it’s layers of resistance all the way up. A pullback toward $35 should be buyable in the short term.

Our old friend Deere (DE) has finally gotten itself up and over resistance. It has a measured target in the $450 area. I would prefer it doesn’t trade back under $400 but the way this stock trades that might be too much to ask.