Overbought Market Conditions
Each evening we focus on the most interesting aspects of the upcoming trading day. These observations are based on the nightly updates of the Futures and Market Bias pages. They are provided for educational purposes only and are not intended to be direct trading advice. Also, keep in mind that these remarks are made up to 12 hours in advance of the market opening, and overnight events may impact the relevance of these observations.
At the time this is being published, the S&P Globex futures are 1.00 point higher and the T-bond futures are down 1 tick.
Just because a market is overbought doesn’t mean it can’t go higher. However, once a market becomes overbought, it pays to keep at least one eye open for a reversal.
This is how I use the CVR III signals on the Market Bias Page to help me time the index futures. Once I have a signal, I treat it as an overbought (or oversold) indicator and then wait for the market to reverse. For example, the CVR III gave a sell signal last night. Today the market started off stronger but then imploded.
When the market is trading lower, it often pays to search out stocks that ignore the market. The Proprietary Momentum List is usually a good place to start looking. For instance, several stocks from last night’s Proprietary Momentum List rallied today, including AboveNet [ABOV>ABOV]up 24, Echostar [DISH>DISH], up 4 ¾, Qualcomm [QCOM>QCOM], up 7 3/8, and SDLI [SDLI>SDLI], up 8 ½.
Downside Bias
Tonight there are three sell signals on the Market Bias page. As you know, there are no guarantees in trading but when you see three or more signals pointed in the same direction it pays to take notice. Just wait for downside follow-through as the S&P Globex futures are trading higher overnight.
As you know, the Trading Where the Action Is list contains the most volatile stocks and is only for aggressive traders who are willing to assume a high degree of risk to capture larger gains.
With that said, two stocks look interesting to me tonight. Go2Net [GNET>GNET] is a strong stock that has begun to pull back (see the Pullback List) and it also is on the Explosion List. This strength and the pullback from recent highs suggests the move could be back in the direction of its underlying trend.
InterVU [ITVU>ITVU], mentioned last night, is still a high-level pennant. Referring to the chart below, notice that it broke out of a base (A), ran up strongly (B), and consolidated to form a pennant. Look to play the long side on a breakout above today’s high, or, for you more aggressive players, look to play a failure of the pattern below today’s low.
ITVU.
After a long
base (A) ITVU breaks out, rallies strongly (B) and forms a pennant (C).
Source: Omega Research.
On the short side, Ameritech [AIT>AIT], mentioned last night as a possible short on the Proprietary Implosion List, formed an inside day today. The stock may still be worth considering on the downside, especially if it can take out yesterday’s low (56 3/4). Other potential shorts include Bellsouth [BLS>BLS], on the Proprietary Implosion List, which is consolidating at lower levels. From the Explosion List, Medtronic [MDT>MDT] appears to be stalling out after rallying off lows.
Best of luck with your trading on Thursday!
Dave Landry
Director of Research
TradingMarkets.com