The market moved lower at the open and hovered around that area due to the uncertainty surrounding the shift in congressional power. However, the bearish move was short-lived when Pres. Bush announced Rumsfeld resignation. The market moved rallied immediately and consolidated at the recent highs. The question now is, can the market breach what seems to be an area of strong overhead resistance. The Dow, S&P and Nasdaq 100 have all moved into an overbought state and there still remains some bearish indicators. So conventional wisdom tells us that a move higher shuold be minimal. But, as we all know sometimes the market defies conventional tendencies. What’s new, right. Our indicators are pointing towards a move lower over the coming weeks, but it seems as though they have been for quite some time. This is the problem with overbought readings. In a strong rally many of the bearish indicators move in and remain there while the market moves ever higher. Oversold readings are much more reliable and we prefer to trade off of those levels. This does not mean that overbought levels should not be traded, it just means you always need to be nimble and make sure that appropriate capital preservation techniques are in place.
RSI Wilder (5) for November 8, 2006
- SPY - 75.0 (overbought)
- DIA - 76.3 (overbought)
- IWM - 68.1 (neutral)
- QQQQ - 72.0 (overbought)
Andrew Crowder, Chief Investment Strategist, www.crowderinvestments.com