Below we highlight a daily indicator that we use to track the S&P 500 and its ten sectors. By tracking the sectors using both momentum indicators and overbought/oversold indicators we are able to identify extreme levels where the probability of a reversal is increasingly likely.
The "Overbought/Oversold" indicator is based on a combination of top down and bottoms up sector and market data, and is a short-term gauge helpful in identifying entry and exit points. The "Momentum" indicator is based on a wider series of moving averages and will help illustrate when a trend has become exhausted. Financials currently exhibit simultaneous OB/OS and Momentum buy signals which indicate that the downtrend in that sector has reached an extreme. Industrials and utilities are very oversold, but we might use more caution with these issues since momentum indicates that the trend may not yet be exhausted.
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