Shorting to Take Advantage of Overbought Market

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.

click to enlarge

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.

Comments

[Greg Pinelli:]

With no disrespect intended.since you obviously put sometime into this..but remember last October..and then November?? Almost everything was oversold..and then it became very much oversold...See all those straight lines in the RSI (taken from StockCharts.com)..that... the fallacy of linear projection...and it's how investors get whipsawed..
I'm not saying charts aren't useful..but it takes MUCH more than that to understand markets. Broader turns in certain equities..and we are seeing them in spades..are very useful. Look at the charts for LINE..SLV...AUY...for my money we are going to see a sharp hairpin turn in these and many other stocks.....

Jan 05 12:50 PM

[Paul Singh:]

Sure things can get more overbought. However, nothing goes in a straight line. I expect a pullack, and am playing it.

If you read closely you will see that this is a *very* short term trade. Please understand the time frame I am using. I am bullish on a longer time frame, as the charts I posted indicate.

During the period you are talking about, I made some excellent short term trades using the T2108 when it reached *extreme* oversold readings.

Jan 05 01:42 PM

[Carl Spackler:]

Since the top of this market was reached, the last 4 times the market crossed to the upside over the 50 day moving average, it quickly retreated. It took during these 4 trips over the 50 day MA only 4 days, 3 days, 36 days, and 14 days before the party was over and the declined resumed. The average days hovering at or above the 50 day MA was 14 days. During bear markets, breaking the 50 day MA only serves as a mark to sell, not a reason to buy. Sell into this rally - do not buy!

Jan 05 10:52 PM

[Briggsy:]

After the inauguration, a Now What? feeling is going to quickly set in which should leave these bulls with quite a hangover.

Jan 06 12:34 AM

[investor88:]

Good to see risk appetite returning, people are looking at a few months rally.

Jan 06 07:33 AM

[chimpanzee-...:]

when the proletariat finally figures out the magic negro has no clothes
there will be a serious test of the October lows

Jan 06 08:46 PM

[Greg Pinelli:]

Paul...tighten up the whole deal...very "short" term trades have very large error profiles....You like gold?..Then tell us some medium term (3-6 mos) trading patterns that make sense for someone other than day traders.....
Keep at it....


On Jan 05 01:42 PM Paul Singh wrote:

> Sure things can get more overbought. However, nothing goes in a
> straight line. I expect a pullack, and am playing it.
>
> If you read closely you will see that this is a *very* short term
> trade. Please understand the time frame I am using. I am bullish
> on a longer time frame, as the charts I posted indicate.
>
> During the period you are talking about, I made some excellent short
> term trades using the T2108 when it reached *extreme* oversold readings.

Jan 06 09:59 PM

[PharmBoy:]

I bought FAZ twice already and it just keeps sliding...can't decide if it's worth averaging down for when the rally eventually (?) comes to an end.

Jan 06 10:08 PM

[Niner:]

This is a free country and you are afforded the right of free speech. And, I shall defend your right to free speech for fear that if you are censored, one day I too will be censored.

But, I very much despise your racial overtones in describing President Elect Obama.

Jan 07 09:15 AM

[Niner:]

Oh by the way.......I'm white and I tend to vote for the most part republican.


> This is a free country and you are afforded the right of free speech.
> And, I shall defend your right to free speech for fear that if you
> are censored, one day I too will be censored.
>
> But, I very much despise your racial overtones in describing President
> Elect Obama.
>
>

Jan 07 09:18 AM

[Kunst:]

Bear market rally, followed by more pain.

Jan 08 03:09 AM

[Paul Singh:]

Why would I talk about 3-6 month time frames when that is not what I trade? I'll leave that to those who are experts at that time frame.

My trades are swing trades that range anywhere from a day or two up to a few weeks. I am not a day tarder.

Best,
Paul Singh


On Jan 06 09:59 PM Greg Pinelli wrote:

> Paul...tighten up the whole deal...very "short" term trades have
> very large error profiles....You like gold?..Then tell us some medium
> term (3-6 mos) trading patterns that make sense for someone other
> than day traders.....
> Keep at it....

Jan 12 02:42 PM