What Goes Up... Short-Term Reprieve Likely in August

I mentioned yesterday about the market’s bullish tendency for the end/beginning of the month. I should point out that I typically - actually I should say - almost never  trade based on seasonal tendencies. However, I do like to use seasonal biases as a tool to push the probability of a potential position on my side.

That being said, according to my overbought/oversold screen below, the major benchmarks have pushed close to a short-term overbought state. While I do not use the numbers below to place a trade, I do use them as the initial screen for potential trades.

Okay, now back to the current market. Today brings the highly anticipated GDP which many expect will be a market moving report. Friday is also a big day for market moving economic reports as the Non-farm Payroll report comes out.

My educated guess is that any short-term gains will be given back in early August. Typically, when the market advances this quickly off of oversold levels we will see at least a short-term reprieve going forward.

All four of the major benchmarks are still below the recent highs so there is still some decent overhead resistance in play coupled with near overbought levels. Just another reason why I think any short-term move to the upside will be not be sustainable.

The Strategies

My hope is to see an initial push to the upside this morning that could (depending on the size of the move) lead to a potential gap and consequently a 'gap fade signal' in the 'QQQ gap fade strategy'. I have my fingers crossed.

As for the sectors I currently have on my radar, Biotech (IBB) and Materials (XLB) are the chosen few with my trigger finger on IBB. The Biotech sector has pushed into an extreme over many time frames, but the shortest time frame I use and my proprietary overbought/oversold indicator are screaming right now so a signal in the 'sector ETF extremes strategy' could be near.

I will be covering position-sizing for the three portfolios (mainly the 'ETF extremes' and the 'gap fade') since they have a longer track record to see how commissions, my monthly subscription cost and several other factors affect the overall return of the portfolio. Stay tuned.

Overbought/Oversold levels for July 30, 2008:

ETF Extremes Options Strategy

• S&P 500 (SPY) - 67.2 (neutral)
• Dow Jones (DIA) - 64.9 (neutral)
• Russell 2000 (IWM) - 65.5 (neutral)
• NASDAQ 100 (QQQQ) - 60.2 (neutral)

Sector ETF Extremes Options Strategy

• Biotech (IBB) - 90.5 (very overbought)
• Consumer Discretionary (XLY) - 55.8 (neutral)
• Health Care (XLV) - 64.7 (neutral)
• Financial (XLF) - 62.6 (neutral)
• Energy (XLE) - 62.5 (neutral)
• Industrial (XLI) - 67.1 (neutral)
• Materials (XLB) - 71.3 (overbought)
• Real Estate (IYR) - 58.9 (neutral)
• Retail (RTH) - 60.8 (neutral)
• Utilities (XLU) - 54.3 (neutral)

Have a wonderful day!

Comments

[win:]

Andrew,
Very helpful article. Now that we've given up much of the gains, do you anticipate a continuation of the ST move up, or a big trend move down?

2008 Aug 03 01:49 PM