An Overbought Market Can Go Higher
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.
Tonight there 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. With that in mind, look for shorting opportunities in the June S&P futures [SPM9>SPM9] and June Dow Jones futures [DJM9>DJM9]. Just wait for downside follow-through as the S&P Globex futures are trading higher overnight.
The grains, which have recently been very strong, stalled out today. May Soybeans [SK9>SK9] look interesting, as they gapped to new 20-day highs but “hooked down†and formed a wide-range outside down day. This may have the longs trapped on the wrong side of the market. Look for a shorting opportunity.
May Natural Gas [NGK9>NGK9], mentioned last night (see archive for 3/30/99), broke out nicely today but imploded and closed poorly. This is evidence of floor traders “gunning†the market to attract breakout players. They now may be trapped on the wrong side of the market. Look to play the short side, but be very nimble as the market will likely remain volatile.
May Natural Gas. Notice that after a decisive breakout, NGK9 closes poorly(A). Source: Omega Research.
Volatility Watch
The June Swiss Franc [SFM9>SFM9] remains on the Volatility Explosions-Low 6/100 Readings List and Multiple Days List. Today it rallied earlier only to close poorly. This upside “head fake†may have the bottom fishers trapped on the wrong side of the market. Look for a potential shorting opportunity as volatility reverts to its mean, especially with the Dollar [DXM9>DXM9], an inverse currency, stalling out near its highs.
Best of luck with your trading on Thursday!
Dave Landry
Director of Research
TradingMarkets.com