03/17/2009 Market Recap: Market Overbought


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The market is overbought and due for a pullback in the near term.  As I warned in the weekend report, statistically today is the most bullish trading day in March so bears should get ready for the final strike from bulls.  Now we saw the strike, which was even more aggressive than what I thought.  Therefore, I still think the market should at least pullback in the near term (note that my tone is softer…) however bears should also be aware of the worst scenario.  According to 7.0.1 Extreme NYADV and NYMO Readings Watch, in the past NYADV had been staying as overbought for 5 days, and now it’s the third day, so maybe bears need to wait for two more days although I doubt it (reasons will be given in the following).  Tomorrow the market may pull back in the morning, but it may close in green with the probability of 68% according to 7.0.4 Extreme CPC Readings Watch in the case CPC < 0.8.  In addition, tomorrow is the Fed day, and the statistics show that if the market rallies sharply prior to the Fed day then it’s very like to sell off afterward.  Therefore it’s prudent for bulls to lock the profit before 2:15pm Fed Announcement.

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There are two issues with today’s rally which makes me doubt if the market could keep overbought for too long.

  1. 1.3.7 Russell 3000 Dominant Price-Volume Relationships, 1524 stocks price up volume down, which is a little bit too high and also a strong hint to the near-term pullback.  You may compare the current setup with what happened after the red comments on the chart, especially while the number is more significant.
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  2. Today the TICK was retreating while the market was going up.  You may see it more clearly on the cumulative TICK presented as follows (Courtesy of www.sentimentrader.com).  In my opinion this is the early warning of pullback.
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Now let’s check out how overbought the market is.

0.0.2 SPY Short-term Trading Signals.  Quite a lot of overbought on the market, while NYADV and NYMO are rather accurate.

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0.0.3 SPX Intermediate-term Trading Signals.  In terms of intermediate term signals NYADV and NYUPV are overbought too.  Of course, in the most extreme scenario the market could go further up for two days but that will be small candles.  This observation agrees well with 7.0.1 Extreme NYADV and NYMO Readings Watch that the overbought could last for 5 days.

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Number of SPX stocks closed above MA10, courtesy of www.sentimentrader.com.  Still way too high.

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1.0.4 S&P 500 SPDRs (SPY 15 min).  ChiOsc is a bit too high, therefore the market may at least pullback in the morning.  Furthermore, should the market gaps up it will be the 5th time during the past 7 days, period.

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