Overbought

On Monday, the Nasdaq rallied early but quickly pulled back
and began to trade sideways. It resumed its rally around mid-day. In fact, it
accelerated as the day wore on. This action has it closing well and keeps it
well above its 50-day moving average. It also has it pushing into resistance
around the 2100 level.

The S&P put in a similar performance. This keeps it
above its 50-day moving average and has it plowing into overhead resistance. It
also has it closing in on new highs.

With the indices melting up, as one would expect, the
sector action has improved dramatically. Most, like the market itself, are now
back above their 50-day moving averages. And many, are either at or near new
52-week highs. These include (but not limited to) Internet, gaming, selected
software, HMOs, selected insurance (e.g. P&C), and selected retail (e.g.
apparel). 

^next^

So what do we do?  I’m amazed that the
market was able to extend its recent melt-up. This continuation has the Naz up
over 9% in 9-days and the S&P up nearly 5.5% in the same period. This
overbought condition is confirmed by low 3-day average NYSE TRIN readings. Also
of interest is the fact that VIX is stretched away from its 10-day moving
average and it is approaching multi-year lows. In English (a second language for
a Cajun like me), this suggests complacency. Considering the above, the market
remains due to correct. However, since the tape doesn’t seem to care, you
probably don’t want to fade it–wait for some signs of weakness. On the long
side, I think it’s wise to “scale and trail” (take partial profits and
trail protective stops on the remainder) since the market has become so
overbought. 

Since there were few meaningful setups tonight,  I
decided not to show any.

Best of luck with your trading on Tuesday!

Dave Landry

dave@davelandry.com

P.S. Reminder: Protective stops on every trade!

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