How overbought are the markets here?

Answer: Most overbought since March 2009.

Let's have a look at the McClellan Oscillators.

The Nasdaq McClellan Oscillator is touching 70. This is the fourth most overbought the NASDAQ has been in the last two years.

The NYSE McClellan Oscillator tells a similar story too. I also marked the sharp decline suffered by the markets the previous three times it reached these overbought levels.

Its obvious that the odds greatly favor a pullback here.

How to trade these markets?

(1) Don't go chasing momentum stocks now. Chances are you will be left holding the bag.

(2) Take partial profits from longs and let the rest run. 

(3) Don't wait to sell at the top. Calling the top is a fool's game.

(4) If you want to go short, start with a small position. This way you can give it room to run instead of being forced to call the exact top. If the market indeed reverses, you will get plenty of chances to add to your positions later.

(5) Most importantly, keep your stops on all short positions no matter how confident you are of a pullback here. Remember, the markets can stay irrational a lot longer than you can stay solvent. The above assumes that you are rational in the first place :).

I will be back today evening with some stocks for the weekend.

Enjoy the Sunday! I see the Sun in all its glory from my window and that can't be all that bad :).

Monday Update:  Click here to see the McClellan Oscillator charts after today's market "action".