One of our signature sayings is “Overbought does not mean ‘sell’.” But what does it mean? In this article we’re going to explore the most common overbought condition that occurs in our indicators – those of the breadth oscillators.
$SPX exploded to the upside after the Fed's announcement that they were not going to taper, with both new buying and short covering entering into the fray. With $SPX now at new all-time highs, it has positive momentum, but is also extremely overbought. This latter condition will eventually lead to some sell signals, but perhaps not right away.
The Fed’s announcement that they were not going to taper was a big sigh of relief for many traders, and the resulting buying explosion was powerful. Short covering was certainly prevalent as well. $SPX and other major indices blasted through to new all-time highs. In doing so, there were a number of overbought conditions that were triggered, but on such a powerful breakout, an overbought condition is actually conducive to higher prices – for a while.
Larry McMillan's CNBC Fed Survey grade was noted on CNBC yesterday. When disccussing the analysts that gave Ben Bernanke's term a negative grade, senior economics reporter Steve Liesman mentioned McMillan's "D" and quoted Larry as saying "this will be his grade in retrospect when the full effect of [Bernanke's] policies becomes known." Watch the video below:
This week’s feature article is a continuation of the one in the last issue. Here, we describe option strategies that are similar to owning stock, or are at least a way to reduce time value exposure, while still retaining some leverage in a speculative position.
What first appeared to be an oversold rally gathered so much steam that it has negated our previously bearish outlook (see indicator review, page 6).
$SPX made a strong upside push this week and that closed the downside gap from nearly a month ago. That officially terminated the "bearish" status of the $SPX chart. It's hard to say that the chart has turned bullish, though, since there is still overhead resistance at 1700- 1710. Underneath, there is support at 1660 and then stronger support at 1630-1640.
In our last issue, the feature article discussed whether it might sometimes be preferable to trade the underlying stock as opposed to buying an at- or slightly in-the-money option. This week’s article is a follow-up to that discussion: we are going to look at various option strategies that are, in effect, almost like owning the underlying stock.
Stocks gapped higher on the open yesterday and just kept going higher all day. $SPX has now closed above its declining 20-day moving average for the first since the market topped out just over a month ago. Oversold rallies – which this still may proved to be (although it seemed stronger than that on Monday) – usually die out at about this level: just beyond the declining 20-day moving average. Chart-wise, $SPX is now at the 1670 resistance area.
At this point, the $SPX chart is still bearish, because it has a sequence of lower highs and lower hows.
The equity-only put-call ratios continue to remain on sell signals. The weighted ratio continues to move higher almost every day, thus confirming its bearishness.
Market breadth is the lone positive area right now. Both breadth indicators improved enough this week to generate buy signals.
The market continues to fluctuate, seemingly with news about Syria. Dovish news is bullish; hawkish news is bearish. However, given the fact that there are intermediate-term sell signals in effect, there is a lot more going on than merely reacting to news about possibly attacking Syria’s chemical weapons delivery systems. $SPX rallied strongly, but failed near 1650.