Bill L.'s  Instablog

Bill L.
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Methodology: setups require certain criteria to be met before trades can be executed, which include weighted statistical studies on several indicators of price, breadth, volume, and sentiment . Amount of risk taken is proportional to how many indicators are aligned. I mainly trade market... More
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  • Thursday, July 5, 2012 - Short Term Update - Overbought, Non-Confirmations Everywhere 3 comments
    Jul 5, 2012 5:13 PM | about stocks: SPY, TLT, FXE, UUP, DIA, QQQ

    Bottom Line:

    The S&P 500 is up 65 points in six days, creating a severely overbought condition. The bond market and the currency market do not confirm.


    Most of the studies that I follow are showing overbought conditions, furthermore, despite the strong showing in stocks the last few days there has been no such equally visible reaction in bond yields and the reaction in the Dollar/Euro has been muted.

    NYSE Mcclellan Oscillator:

    (click to enlarge)

    Notes: the Mcclellan oscillator closed yesterday above 300, and the three and five day moving averages are both above one standard deviation from the mean. This is one of the most overbought readings in recent memory.

    NASDAQ Mcclellan Oscillator:

    (click to enlarge)

    Notes: similar to the NYSE oscillator in the fact that it too is very overbought, the difference being that the NASDAQ closed positive today pushing the NASDAQ Mcclellan to even an higher overbought status.

    Percentage of Stocks Above their 20 DMA:
    (click to enlarge)

    Notes: One of the most overbought readings of the year, at 85%. Both the one day close and the five day moving average are in the setup zone, if either of these closes below 70% with a big down day the market, that would confirm the short trade and most likely signal the top is in.

    Advancers vs. Decliners

    (click to enlarge)

    Notes: the five day moving average has traversed well into the overbought range and appears to be turning lower.

    Advancing volume vs. Declining volume

    (click to enlarge)

    Notes: advancing vs. declining volume has also reached (or nearly so) overbought status.

    NYSE Tick:

    (click to enlarge)

    Notes: the NYSE tick is registering the most overbought reading in the past six months…

    NYSE Trin:

    (click to enlarge)

    Notes: the NYSE trin is the lone standout that has failed to reach an overbought reading.

    10 & 30 Year Note Yields:

    (click to enlarge)

    (click to enlarge)

    Notes: the stock market has been rallying since the low set on June 4, curiously however note yields have not been participating with the same zeal. This is made more curious by the fact that during this time period there has been a very poorly received 10 year auction. We can see from these charts that note yields have been in a horizontal pattern for approximately four weeks, a breakout from this pattern will most likely confirm the next major move and the stock market. So far however the best interpretation is that bond investors are nowhere near as optimistic as their stock market counterparts.

    (click to enlarge)

    Notes: another curious and concerning non confirmation is the fact that the Euro has really failed to participate in the risk on rally. Most concerning is the fact that the rally in equities was sparked by the big Euro break through on 6/29, but looking at this chart we can see that the Euro has in fact reversed all the progress and it made post the announcement.


    The most recent run in the stock market has produced overbought readings almost unanimously across the board, while the bond market and the currency market are failing to confirm the move. I believe the next profitable trade will be on the short side.

    (click to enlarge)

    If we close below 1365 I would take a shot on the short side and place a stop at the previous highs. Seeing how overbought the market is, and how other major markets are failing to confirm, this looks like a pretty good risk and reward set up to me.

    Talk again soon,

    -Bill L.

    Disclosure: I am long BGZ.

    Stocks: SPY, TLT, FXE, UUP, DIA, QQQ
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Comments (3)
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  • sundate36
    , contributor
    Comments (291) | Send Message
    A few other important reasons to expect lower stock prices: a) recent decision by ECB not to extend LTROs -- if I understand it correctly (see the most recent posts on this by Paulo Santos and Marc Chandler) + July 9th deadline to ratify the Euro summit proposal was pushed towards end of July and b) Q2 GDP is projected at 1.5% (even though BB said 2%, Ken Rogoff in a recent interview on Bloomberg suggested 1.5%). In a normal world, stock prices should follow down. My guess is that the unemployment report tomorrow is not going to be too terrible but everyone knows that it's going to be revised down a month from now. I think a lower projected GDP is a more important issue going into the summer.
    5 Jul 2012, 07:24 PM Reply Like
  • J Dub Lone Star
    , contributor
    Comments (157) | Send Message
    So who in their right mind has been buying? I guess people with the right kind of friends, the kind that can bail them out with tax payer money.


    Great analysis though Bill, your always on top of your game.
    5 Jul 2012, 07:45 PM Reply Like
  • basehitz
    , contributor
    Comments (1541) | Send Message
    Bingo! When they're trading other people's money with the implicit backstop of the federal gubamint, and the only priority they have is next Qs bonus, they chase . . . whatever. The reasons are irrelevant.


    However, if selling from carbon-based lifeforms engages, the low-volume meltups courtesy of the bots get trampled. At that point, real price discovery produces opportunities in flurries.


    The NFP report just came in bad again. Might be a good opportunity in the making to short, or wait a brief time to go long in anticipation of the next pronouncement from our Central Planners.
    6 Jul 2012, 09:06 AM Reply Like
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