Tuesday, March 2, 2010

Are we overbought here?

And the answer to that would be a yes. But, we will come back to that in just a moment. The markets pretty much went nowhere today, specially the S&P. Nothing wrong with that if you are bullish as the bulls have a great run in the past one week, and a little breather or even a pullback would do them no harm. What I did not like, was the close today. Pretty weak, if you ask me. 1110 is the support area here and it is going to be joined by the MA(50) soon there, making it even more important.

Now, back to the main question - Are we overbought here? Like I said earlier, yes we are. Like the regular readers know, I don't use stochastics or RSI to find out overbought/oversold conditions as these indicators are pretty much useless in trending markets and can stay overbought/oversold forever, making you miss valuable opportunities waiting on the sidelines. The chart below shows the 2 year plot of the NYSE McClellan Oscillator. As you can see, we are now in the territory from where traditionally markets pullback, making the markets overbought as of today.

Now being overbought doesn't mean that the markets will fall down tomorrow. An overbought market can easily turn into a "more overbought" market  and an oversold market can easily turn into a "more oversold" market. What it does mean is that the probability of a pullback here is high. So, it might be a good idea here to lighten up your long positions (I did just that today), stay small while opening new long positions and be careful while holding them overnight.

A pullback will certainly not hurt the bulls here. A test of MA(50) cannot be ruled out and a bounce off it would be very bullish. It still seems to be a buy on dips market and why not just go with that until it stops working.

Personally speaking, I lightened up some of my long positions for the reasons given above. I got out of CAL at 21.00 for ~0.5% loss as I didn't like the pre market action in it. A smart move it turns out as it closed at 20.51. I also closed out my WFMI position at 36.51 after holding it almost for a week for around a 3% gain. It was acting well but I closed the position for the reasons explained above. Heading into tomorrow, I am around 50% long and 50% cash.

I liked the action in gold and oil today, and will be back later tonight having a look at their charts.

Take care and good luck.

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