I mentioned yesterday how the momentum indicator that we follow moved back into an extreme state. Couple the momentum reading with three of the major indices (the Dow, Russell and S&P) moving back into overbought territory today and you typically have a high probability for a short-term reversal. Indeed, on the surface the market looks strong, but there are some underlying short-term and long-term indicators that suggest a move lower is in the cards. Historically, the first few trading days of December are seasonally bullish which, in many cases, can keep the market afloat especially during the month of December.
I would also like to point out that the Nasdaq 100 is the only major indice that is not participating in the sharp move higher. Today’s move makes a stronger case that a top is possibly forming which just another reason to keep a close eye on how the market, and more specifically, the tech heavy NDX reacts over the next few trading sessions. Keep a close eye on the 1800 level of the NDX. If we get a break below that level that holds we could be in for a nice short-term trade going forward.
RSI Wilder (5) for December 5, 2006
- SPY - 74.6 (overbought)
- DIA - 70.7 (overbought)
- IWM - 72.3 (overbought)
- QQQQ - 63.4 (neutral)