Dow Nearing Technical Extremes: Short Opportunity On the Horizon

The Dow (DIA) has once again moved into ”very overbought territory” and our shorter-term proprietary indicators are nearing also nearing an extreme. I mentioned yesterday that if the bulls can sustain the positive momentum through today then we could see a short-term opportunity present itself as early as Friday. Thursday of option expiration week is typically positive and tomorrow is no different as the S&P, Dow and Nasdaq 100 are historically higher 61.9%, 71.4% and 71.4% of the time.

Remember, historically if the market is overbought as the market moves into the week of post options expiration a decent short opportunity is usually found. In this case, the large-cap Dow looks to be the most favorable for a short play. As you can see below the major indice is already in a “very overbought” state and continued push higher will only increase the probability of a short-term move lower over the short-term (1-5 days).

As a trader, it can be frustrating waiting for high-odds set-ups, but as my loyal readers have witnessed since the inception of my service, patience pays. Knowing when to sit on your hands is often the most difficult aspect of trading. I will allow the market to make that determination for me over the next few days. Stay tuned!

Overbought/Oversold levels for May 16, 2007

SPY - 69.3 (neutral)

DIA - 84.0 (very overbought)

IWM - 42.7 (neutral)

QQQQ - 54.1 (neutral)

GLD - 27.2 (oversold)

OIH - 70.1 (overbought)

Comments

[omooc]

Excellent presentation. I wonder why the market is usually up the day before and on the day of option expiration, which will be tomorrow (5/18). Excellent historical briefing. omooc

[aperio7]

A quick check of the inverse Dow ETF, DOG, and the double inverse Dow ETF, DXD, shows that in the last two weeks, a lot more shares have been trading. I wonder if any of that relates to options expiration. If not, it's either investors getting ready for a possible drop in the Dow or investors giving in to its relentless rise. In fact, on Tuesday and Wednesday of this week, about twice as many shares of DXD traded as normal.

I was also looking at the economic calendar to see if any reports might trigger a pullback. On Tuesday, we get the durable orders report, Thursday it's new home sales, and Friday it's existing home sales, but I don't think those'll be enough to startle investors unless the numbers are really bad one way or the other. Steve Ferris