Overbought Again

The market has hit an extreme overbought reading based on the 3-day moving average of the TRIN. To see a detailed discussion of this indicator, see “Like WAAAY Overbought.” I posted that on Friday, August 22nd. On the following Monday, SPY plunged from $129.65 to $127.02. Not a bad call, huh?

On the chart below, the red line at the top is the 3-day moving average of the TRIN. The blue arrow points to August 22nd when it hit 0.79. Directly below the blue arrow, you see the red arrow pointing to the peak on the SPY chart, and then the plunge the next day. (click chart to enlarge):

At the far right, the purple arrow points to the current position of the TRIN average, which is now at 0.67, indicating a much more overbought reading than at the blue arrow. So, a sharp drop for SPY can be expected any minute now.

In my first post on the topic on August 22nd (linked above), I wrote:

“it probably signals the end of this bear-market rally”

While that wasn’t correct, it was very close. Since then, SPY has only been able to close above the August 22nd close one time, on August 28th. So, these TRIN signals are very important.

Also on the chart above is a black arrow pointing to a peak on the TRIN average, which was a buy signal. I completely missed that because it occurred during the panic selling leading up to the last jobs report on Friday, September 5th. While the jobs report is a huge market-mover, we see here that it served to create a fantastic buying opportunity for a quick trade.

So, the moral of the story is not what the jobs report says, but what sort of short-term condition it creates in the market. The same will be true for the FOMC meeting this week. But this time around, instead of obsessing on what the FOMC does, I will be obsessing on how the TRIN average reacts to what the FOMC does.

Click here to download the TradeStation “workspace” document that contains my TRIN chart. You will need the TradeStation program to open it and use it. You don’t need TradeStation’s extra “radar screen” feature for this workspace.