Overbought markets and how to trade them

Its been a great month for the bulls and its now time to turn to McClellan Oscillator to see if the markets are overbought here. While an indicator that calls tops and bottoms perfectly does not exist and will never exist, McClellan Oscillator in my opinion, is fairly decent in determining overbought and oversold conditions. The overbought levels are marked on the Nasdaq and NYSE McClellan Oscillator charts below.

An overbought market can easily become "more overbought" just as an oversold market can easily get "more oversold", but the odds greatly favor a pullback or a period of consolidation 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 :).

Here is a post outlining the important S&P levels for the coming week.

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Take care and good luck!

The week ahead

Friday was the perfect day of consolidation for the bulls after the huge run-up the day before. The market bounced from close to MA(200), which is the immediate support level with 1300 being the next resistance level.

A few more sessions of consolidation or even a pullback would do the bulls no harm here. Let me rephrase that by saying that a few days of consolidation or a pullback is actually what is required now considering the overbought conditions the market currently finds itself (I will try and do a post on that later in the day). No harm done in either case as long as 1260 holds. So, the following are the important levels for next week:

Resistance: 1300

Support: MA(200), 1260

Take care and good luck!

Chart of the Day

Today's Chart of the Day is ZAGG. Has already had over 40% move up this month, but this has been followed by a couple of weeks of consolidation, which means it is not overbought anymore.13.50 has been an area of tough resistance but it finally managed to close above it today.

Take care and good luck!

Short Squeeze play

A stock with 40% float short, yet to report its earnings for the quarter and a decent looking chart definitely has my attention as a possible short squeeze play. The fact that it just fell around 1% on a day like yesterday is not too shabby either. I am talking about Tesla Motors - TSLA. Below is daily chart which shows some decent consolidation after a big move up. A break of 29 could lead to another run up. Its not the best looking chart out there but for a stock with almost 40% short float, I would expect a much worse chart. Below are the daily and weekly charts. The volume pattern has been bullish for the last few weeks as can be seen from the daily chart.

The huge short float should produce some interesting action leading up to the earnings report (November 2).

A word of caution......it is important to stick to your stop loss points in any position you take, but it is especially true of short squeeze plays. Those who use fundamental analysis might have a very good reason for shorting the stock so aggressively, but as a trader who uses technical analysis, I dont care what that reason is, but that is true only if I always respect my stop loss. While short squeeze plays can reward one with quick and big profits, they sometimes offer no second chances if you disregard your stop loss.

Take care and good luck!

Watchlist for next week

Following are some setups I like for the coming week. The important levels are marked on the charts itself. As always, it being earnings season, be sure to check when a particular stock is reporting before taking any position in it.



And here are the important levels on S&P for the week ahead.

Take care and good luck!

S&P important levels

Sorry for having disappeared for so long but life has been hectic as usual and add to that, a fair bit of travelling and what you get is a lot more hectic than usual and no time to trade. However, this being a holiday week in India combined with the time change from Nov 6 means I should have a lot more time to trade in the near future (fingers crossed!). And that should also mean a lot more regular blog posts. Well, like I said, I havent got time to trade in the last few weeks, and also havent been following the markets much, so its time to get some homework done before market open on Monday. Let's get started by looking at the important levels at the S&P for the short term.

First thing that stands out, at least to me, is the heavy resistance we can expect at 1260. The erstwhile support level from both March and June has now become an important resistance level and should be a tough nut to crack.

It turns out that 1260 is also an important Fibonnaci level, adding further to its importance. Its amazing how these things play out!

Looking for support levels, Friday was a pretty important day for the markets with the index finally closing above 1230, the first time it has done so since early August. One could expect some support at this level.

Following is a 15 minute chart of the S&P that shows that 1220 is an important support level. So, 1220-1230 would be your support zone.

So, those are the levels to watch out for on S&P for the coming week. Above all, watch out for the news with it being an important week for the Euro. But then, which week isn't?

Take care and good luck!