Shorting to Take Advantage of Overbought Market

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Includes: ARCH, CKH, DE, FAZ, FSLR, JBLU, SHAW, SPY, SSO, STR, SUN, TXI, USD, USM, VMI, X
by: Paul Singh

Market Notes

The market is overbought. I'll get back to that, but first let's take a look at the overall picture. The market, via SPY and SSO is putting in a healthy looking bottom pattern. RSI has broke out over the middle area. Price is putting in a constructive looking price pattern. Depending on how you view it, an argument can be made for a reverse head and shoulders or a bottoming cup and handle. Price has broke out over the 50 day moving average. Last and probably most important, the volume pattern is strong, which signals underlying accumulation. Underlying accumulation is an important trait when bottoms are put in.

Note that this "bottom" is not a long or intermediate term prediction. However, it does signal a good probability we will see, at the least, a good bear market rally. I don't mean the 3 day variety we just got, but the type that could last a few months.

Short term, the market is overbought. For my trading style, it is not a good time to buy. Stochastics have reached overbought conditions (see chart), and the T2108 indicator has reached extreme levels, currently at 83.

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The Trading Plan

The plan right now is to enter short term short positions to take advantage of the overbought conditions. Once overbought conditions are worked off, I will get ready to enter long in focus list stocks that pullback to support on low volume.
I will only enter shorts on strength. If we get good strength Monday or Tuesday, I'll enter positions listed in the focus list. Note that I already took a small position in FAZ on Friday.

Focus List

All longs are overbought and require pullbacks to support. Note that strong volume patterns and overbought stochastics on all stocks. Aggressive types can try taking quick shorts on some of these. This requires entry on price strength. A tight stop must be used.

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