As we all know by now the market surged today before and after the highly anticipated FOMC announcement. I will not bother going into the details of the announcement (you can read that here) because my focus as a trader is the next short-term move. Where are we headed? While no one knows for certain, the following historical tendencies might help decipher some probable outcomes.
I went over a few stats today and found that when the market, more specifically the S&P 500 (SPY), is higher before and after the FOMC release the often performs poorly over the short-term. Since 1998 the market has only witnessed this type of scenario seven times and the following day only two occurrences pushed higher and only by a paltry amount. A week later all seven instances were lower by an average of approximately 1%.
I have mentioned several times about the tendency for a post-Fed fade and, at least over the short-term, my sentiment sides with the historical statistics.
However, I would not be surprised to see a gap higher tomorrow that officiallypushes the major benchmarks I follow into a short-term overbought state. This would also test the recent highs in all of the major benchmarks which should act as a decent area of overhead resistance (just look at the charts for SPY, DIA, IWM and QQQQ over the past few weeks). If this scenario does occur we could see a trigger in all three strategies. It has never happened before, but that certainly doesn’t mean that it is out of the question.
Several of the sectors (5 out of 10) that I follow have also pushed into a short-term overbought state. Health Care (XLV) has pushed into a short-term ‘very overboguht’ state and my shortest-term proprietary indicator is nearing an extreme state. This is just another reason why I think a fade or pullback is likely over the short-term.
As always I will send out a real-time alert to all subscribers if and when a signal occurs in the strategies.
Have a wonderful afternoon!
Andy
Overbought/Oversold levels for August 5, 2008
ETF Extremes Options Strategy
* S&P 500 (SPY) - 62.8 (neutral)
* Dow Jones (DIA) - 64.8 (neutral)
* Russell 2000 (IWM) - 65.4 (neutral)
* NASDAQ 100 (QQQQ) - 63.7 (neutral)
Sector ETF Extremes Options Strategy
* Biotech (IBB) - 74.1 (overbought)
* Consumer Discretionary (XLY) - 73.0 (overbought)
* Health Care (XLV) - 83.7 (very overbought)
* Financial (XLF) - 71.0 (overbought)
* Energy (XLE) - 32.6 (neutral)
* Industrial (XLI) - 61.9 (neutral)
* Materials (XLB) - 34.8 (neutral)
* Real Estate (IYR) - 65.6 (neutral)
* Retail (RTH) - 74.2 (overbought)
* Utilities (XLU) - 31.3 (neutral)
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