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.

75 Responses to “Overbought Again”

  1. admin says:

    Oil futures trading will begin early – Sunday at 10:00am:

    http://www.nymex.com/index.aspx

    Let’s see if we get another energy-sector crash as we did with Hurricane Gustav.

    Sunday at 8pm, CNBC will have a special report on the latest Sunday Surprise financial “miracle” that will, no doubt, save the world yet again.

  2. K says:

    matt i somehow have a feeling this might be gustav inversed.

  3. Dressguard says:

    Thanks for the update, Matt! Great chart and posting. :-)

  4. Crimson Ghost says:

    Plunge in the buck Friday will mitigate against another energy sector crash.

  5. Pooch says:

    Matt which website did you get that graph off of

  6. anon says:

    It’s TradeStation Chart Analysis software. Just read the window title and don’t bother Matt with stupid questions. :-(

  7. Crash says:

    Good post Matt.

    If there is a pop up at the open, I’ll be doing big PUTs right away.

  8. admin says:

    Pooch,

    I made the graph myself. It only took a couple of minutes. And it updates in real-time for me. I can also quickly switch to an hourly view, clone it for use with the TRINQ and QQQQ, etc. It pays to have a high-powered charting program.

    Matt

  9. Pooch says:

    Is there anyway we can access it.

  10. admin says:

    Pooch,

    If you had TradeStation, I could email it to you.

    Matt

  11. Crash says:

    Pooch,

    I think you should take some of your winnings and invest in TradeStation. You would make a great chartist.

  12. admin says:

    The dollar index (DXY) was up a nickel on the week. The dollar ETF (UUP) was down a dime, and pulled back to its up-trend line on moderate volume. The UUP hourly stochastics are oversold and should produce a bounce soon, though the intra-day chart from Friday looks nasty. Traders appear to have placed a bet on a Fed rate cut. If the Fed doesn’t cut, the dollar should rocket back up and knock the energy sector down.

    It doesn’t look to me as if the Fed has signaled a rate cut. There was no Wall Street Journal article “predicting” a cut, and Bernanke has, so far, refused to give Dick Fuld a dime like he did with the Bear Stearns bailout. The Fed looks stingy to me.

  13. Dressguard says:

    Yes, that’s what I’m thinking too. There wasn’t anybody coming to the front and alluding to a rate cut. Not even from the 2nd or 3rd line. Normally central banks do that to prepare the markets. The only reason would be to make the rate cut more efficient on the announcement day. But it wouldn’t be very credible for the FED. I am deciding my postition now: there won’t be any rate cut!!!

  14. Pooch says:

    Matt do you not have my EM address were you type a reply

  15. admin says:

    Pooch,

    The chart is in a TradeStation workspace. If I sent that to you, you couldn’t open it without TradeStation. The charts I have posted here on the blog can be downloaded with your browser.

    Matt

  16. admin says:

    Dressguard,

    I remember that you correctly predicted the last ECB hike based on a story in a German newspaper. So, our central banks seem to still be adhering to their “transparent” policy of not hitting the markets with surprises.

    Matt

  17. Dressguard says:

    I admire your memory!!!

  18. K says:

    is the version you use matt $60 or $100 /month?

  19. admin says:

    Wow. Cramer is going on and on and on about how Citigroup will be the next target for the shorts. For a guy who claims that he doesn’t short, he is pounding the table awfully hard. Here is what he said that he would do if he were still running a hedge fund:

    “I would buy position limit September 17.50 puts and position limit September 15 puts.”

    It sounds to me like he is giving marching orders to his hedge-fund followers.

  20. admin says:

    Dressguard,

    It pays to remember who made the right calls!

    Matt

  21. admin says:

    K,

    I have the full-blown thing, though you don’t need the “radar” feature to use this chart. The radar thing is good though.

    Matt

  22. K says:

    even before finding this blog and becoming active i have several times looked at tradestation. but with my small amount of investment have decided to hold off for a bit more. stockcharts has worked fine so far and thanks to you and others now i have different options to try and see which is my style

  23. Dressguard says:

    The next target after LEH is MER. It’s already in the making. MER hammered down like crazy this week. If the bears go for the big guys like C and BAC then I will short the hell out of my brain. ;-) This would be a new shorting dimension.

  24. K says:

    i thought there are only 3 dimensions. eheheeh
    yeah MER will certainly get pounded too. i don;t trade shorts or options yet so i am out of luck in a way. inverse etf’s are my way to hedge this market

  25. admin says:

    I have added a link to the bottom of the post above for people who want to download my TRIN chart. You will need TradeStation to open the file. TS isn’t cheap, and their brokerage and customer service suck, but the software is good. So, for those interested, I recommend just signing-up for their software and skipping the brokerage account.

  26. eli says:

    For those playing in the oil patch, here is a link to a site on all that’s oil.
    Of interest is a timely assesment of the possible damage to the oil and natgas infrastructure caised by Ike.

    http://www.theoildrum.com/node/4525

    Also, my bank of choice to fail is still Wachovia.

  27. Dblwyo says:

    Outside the trading universe where the Fed makes 98% of their decisions based on economic conditions there’s no particularly reason for a Fed cut. Real rates are already low (negative depending ?), monetary stimulus isn’t working as traditional because of the credit tightenings which aren’t fixable with monetary tools but are addressable with the various facilities created for this emergency. Even if the Fed share my/our outlook pessimism they won’t lower unless they a) think it’ll work, b) won’t need the ammo for later and c) don’t think they’ll need it later because the economy will turn back up. Rate cut therefore very low probability and extremely scary if it happens. It’ll mean the last ones which were emergency cuts under market collapse aren’t seen as working. In fact I’d bet they regret lowering them as much as they did now that the new facilities are created.

  28. admin says:

    As Helene Meisler reports, there is an island reversal on the FXE chart. So maybe there is a sizable retracement for both the dollar and euro coming soon.

  29. admin says:

    Alan Farley of RealMoney.com said that he went to cash Friday afternoon, and doesn’t want anything to do with the market here. Farley is an excellent trader. In fact, he rang the proverbial bell at the top of the March-May bear-market rally on May 21st in a post titled Dingy Dongy. That was only two days after the exact top. Here is what he wrote Friday:

    “Tough to hold stocks this weekend. Right now the market is saying neither Merrill Lynch nor AIG are going to survive the bear raids. VIX at 26 and rising. No thank you, maa’am, I think I’ll step aside here.”

    The smart money are pulling their bids.

    Cramer may be nuts, but he has excellent people on his site, not counting Vince Farrell, of course.

  30. admin says:

    AAPL is in critical condition. The stock is at the level from which it broke down back on January 23rd when it was on its way to $115. This level was strong support during a dip in April, and the bottom of the Steve-is-Dying scare after hours on July 22nd. Considering the never-ending decline of the retail-sales numbers, I wouldn’t bet on Apple holding this level. Sorry K.

  31. Dressguard says:

    Roubini working overtime:
    “If Lehman collapses expect a run on all of the other broker dealers and the collapse of the shadow banking system”
    http://www.rgemonitor.com/roubini-monitor/253567/if_lehman_collapses_expect_a_run_on_all_of_the_other_broker_dealers_and_the_collapse_of_the_shadow_banking_system

    And German Finance Minister urging to save LEH before Asian markets open on Monday:
    http://biz.yahoo.com/ap/080913/germany_lehman_brothers.html

    Very interesting weekend. Maybe I shouldn’t have sold my SKFs last week. :-)

    Apple btw is in premium consumer business. Meaning very expensive electronic consumer products. If they don’t feel the heat who will.

    Matt, you had a very interesting posting when AAPL announced their new iPhone. Double speed, half price – that’s the way AAPL spells recession.

  32. K says:

    Matt after reading people losing 100k+ on Freddie i think i will take my 10% loss and use the other 90% to find better things to do with it. thanks for giving your opinion. i will not be able to trade Monday but maybe set a sell order a little high and hoping whatever hap up it is it hits.

    any opinion on that conflict? i don;t like to set sales before 11am but i guess if i set a high limit and it executes on a gap up that’s just good.

    the new ipod should be ok for them but still not worth the hype even for me the apple investor.

  33. David says:

    Dressguard, you may be right about selling SKF. the Bullish Percent Index for Finance points to trouble ahead for UYG and XLF. this among other things. I was just about to post this chart when I read your post.

    http://tinyurl.com/5na78c

  34. Dressguard says:

    If WallSt. realizes the implications of a non-deal regarding LEH they will find a solution on Sunday. I think they do. Otherwise they wouldn’t all work overtime this weekend. So we might see a relief rally on Monday on the announcement of a LEH “bailout”. Whether the counterparties swallow the pill is still to be seen. I doubt it.

  35. K says:

    wot wash sale rule of $200 but i guess i could buy apple low later on in the year and sell high.

    btw every time i have bought apple my technical charts have not been where i want them. i need to discipline myself or my investments will be wiped bit by bit.

  36. K says:

    Holy crap David that chart is awesome! thanks i love visual charts that explain situations

  37. K says:

    Btw. any of you guys ever try buying IPO’s?
    Emdeon is one i’m looking at.

    but IPO’s got no technicals so i’m as blind as the next guy
    I’m sorry for the long post to follow. but anyone got any opinion or should i stick to established stocks?

    Despite various reforms, health care still represents a growing part of the U.S. economy — consuming about 16% or $2.1 trillion of GDP. In fact, the growth rate is expected to be about 6.7% per year until 2017 (amounting to $4.3 trillion or 20% of GDP).

    A big component of these expenditures is administration (representing about $360 billion or so). And, this is what Emdeon is focused on. The company has recently filed to go public.

    Basically, Emdeon provides revenue and payment cycle management solutions. This involves connecting payers, providers and patients. Some of the capabilities include pre-care patient eligibility and benefits verification, claims management and adjudication, payment distribution, payment posting and denial management, and patient billing and payment collection.

    All in all, Emdeon has built a solid platform. Last year, revenues came to $808.5 million, with adjusted EBITDA of $182.8 million (90% to 95% of revenues are recurring in nature). The company’s system processed 3.7 billion transactions last year.

    Emdeon is backed by two major private equity firms: General Atlantic and Hellman & Friedman LLC. And the lead underwriter is Morgan Stanley (NYSE: MS).

  38. David says:

    Matt,

    I apologize in advance, but I am going to need to correct you on this: “Cramer may be nuts.”

    No way! Cramer is absolutely and positively NUTS! LOL

  39. David says:

    Here is another one for you guys. SPX weekly.

    http://tinyurl.com/63bmz5

  40. David says:

    K,

    did you catch Cramer’s reasoning for a housing bottom? It goes something like this: “The housing stock index topped a year before house prices. Therefore, since the housing stock index has bottomed, housing will bottom a year from now.”

    This is called a non sequitur which is a logical fallacy. Even worse is the fact that his assumption anout the index bottoming may not even be true.

  41. admin says:

    Kudos to Barry Ritholtz for highlighting that vintage Cramer video. Recently, I’ve mentioned that line-in-the-sand episode a few times, and it’s a kick to see it again. (See K’s link above) That was when Cramer called the bottom in housing stocks in 2006 during what turned out to be a bear-market rally for the sector. He was off by at least two years. He is calling yet another bottom now. Funny thing is, some of the shrapnel from the Lehman explosion will be a liquidation of its vast real-estate holdings which could crush the housing market even further. So, it looks like Cramer will be suckered by yet another bear-market rally.

  42. K says:

    Cramer cracks us all up. Sucks for the people that get suckered into investing in stocks he deems ready to rally.

    cramer is a fine example of what happens when you are being bullish or bearish too frequently

    market down he’s pissed. market up he calls a bottom.

    ;) why aren;t we all cool like him guys? get our own TV show too. haha

  43. admin says:

    K,

    If you like Apple, there is nothing wrong with making it a long-term holding. Steve Jobs is a genius and Apple is a great company after all.

    Matt

  44. Dblwyo says:

    Did you guys see the foreclosure and alt-A implosion stories on Bloomberg today ? Will get URL’s if not but all the sturm und drang we’re going thru now is from sub-prime and ripples to de-leveraging and balance sheet damage. What happens when prices keep dropping and alt-A’s start defaulting ? And then commercial real estate, consumer loans and business loans ?

    We’ve just started. What’s the blog’s take on whether or not that’s factored into outlooks and priced accordingly ?

  45. K says:

    matt i do have apple long term that i bought last year at $145 but heck i made 50% and rode it down to nearly 0% now :(
    i don;t think this market is long term material yet.

  46. after says:

    Hi Matt, do you trade gold/ gold shares and if so, do you have an opinion at this time ?

    thx

  47. K says:

    JAVA and UGA are possible plays for me this week. am not day trading and my trades usually last 1 week to 1 month and if indicators are still good up to 3 months.

  48. K says:

    and to explain my trading style here is a picture for Java which is one of my potential plays.
    http://i35.tinypic.com/mb39s8.png
    I use ADX, Parabolic SAR, On Balance Volume, and MACD. if most of those are pleasing I just look at CCI to see if i’m in a good position.

    But stockcharts is having a problem with my payment so am stuck using the freebie 3 indicators chart

  49. K says:

    btw i think energy stocks will rise this week and maybe into the next. hence bringing market down whether it wants to or not.

    and i will stop before i make too many claims tonight! :)

  50. George says:

    Stock charting and pattern identification is interesting. Like watching a great violinist, I enjoy hearing the music but would not be able to make one note sound as sweet.

    Stockcharts has a public list of many folks that contribute free chart perspectives. It is often interesting how some will see a movement differently than others.

    I have no clue how to analyze a chart and figure out which pattern is in effect. I envy those of you who do because it shows that you understand the bigger picture which helps with making probability decisions.

    There are several I watch each day from Stockcharts. One of my favorites is this one:

    http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID1926808

    You may have to copy/paste that link because I don’t know how to make it connect automatically. I tested the copy/paste and it works okay.

    The first 3 chart pages are the major indexs. Especially take note of the 3rd page where Maurice shows an S&P monthly chart that, in his opinion, is forming a cup-and-handle pattern.

    I hope I have picked a good chartlinist.

    See what you think.

  51. admin says:

    Dblwyo,

    I saw those alt-A stories on Bloomberg. I doubt that they are priced into the market. The worst was supposed to be behind us in March, yet Lehman’s mortgage paper may have only been priced into their stock price last week. Wall Street’s propaganda machine can keep things priced-out, and suckers roped-in for a long time.

    Matt

  52. admin says:

    after,

    Gold is not one of my interests, though I did short it a few weeks ago when its plunge began.

    Matt

  53. admin says:

    George,

    I think the bottom of that cup-and-handle pattern is too sharp. They are supposed to be more like a “U” than a “V”. I hope that he is right though, but since the economy is contracting, I’m betting the other way. I think that long-term trend line gets taken out, maybe soon, and the pattern resolves into a nasty double top.

    Matt

  54. newbie says:

    The CNBC website reports a few details about a draft plan for LEH. Banks to kickin a comulative $30B, but they are balking. Maybe the GOVT and major private interests will compromise enough to make a deal.

  55. Shaishen says:

    K w/regards to IPO’s

    I used to play the hit and run game in the dot com era when Blodget and friends pumped ipo’s. It’s very different now.
    If your research gives you convincingly positive feedback on the company you may consider a commitment.

    Keep in mind, short to medium term chances for a decent profit are slim, meaning you would be investing not trading.

    Perhaps you checked this site
    http://www.iposcoop.com/index.php?option=com_content&task=view&id=1545&Itemid=148
    As you can see short/medium term ipo’s do not offer a great reward ratio.

    Of course your pick could be the exception and you get an FSLR run…

    Shaishen

  56. towelie says:

    Well, I thought Friday would be down day. Towelie 0, market 1; for those keeping track. Given your overbought reading, I can’t imagine Monday being an up day…unless the Fed found a pile of gold buried in the basement of Lehman Bros. over the weekend.

    George, interesting link. It is fun to look at other charts to see how people map things out. With that said, I don’t like the way that first S&P chart is drawn…it seems like they decided they wanted a symmetrical triangle first and then forced it onto the chart. I would expect a symmetrical triangle to bounce from the top to the bottom a few times…this jumps to the top twice and then to the bottom and that’s it. To each his own. A friend of mine refers to TA as “reading the tea leaves.” I think TA is a self-fulfilling prophecy, for the most part.

    Matt, I don’t think Alt-A loans are priced in at all. There a quite a bit more of them than there are sub prime and they will all be resetting rates in the next year or two. However, as long as the banks are allowed to keep this garbage in the world of level 3 assets, they will appear solvent. Judging by BSC, FNM/FRE, and LEH, it appears the banks are unwilling to acknowledge the true price of these assets until it is far too late. So who knows how long this can keep going. The bottom line is, it can collapse at any moment. Just look at the BSC or LEH charts. I personally believe the majority of the banks in this country are insolvent and it would be painfully obvious should they be forced to mark their assets to market values. Instead they are allowed to misrepresent their assets for the good of the system. This is fraud. The Fed can cut rates all they want, but they can’t create wealth. Reminds me of the first time I saw the term “less bankrupt” (e.g. “they are less bankrupt than we thought.”) as if there is some gray area of insolvency. Just like my girlfriend who is “kinda pregnant” or my grandfather who is “slightly dead.”

    To make my week complete, I just had to check the price of the MER put options that I sold (in a panic) on Monday morning (sent them in as a market order, forgetting I was dealing with options and not stock). Now that MER has crapped its pants, I would be sitting on a nearly 300% gain. instead I got a 60% loss. Had someone purchased those options at my sell price on Monday, they would have had a nearly 10x gain. I will not be making that mistake again. Towelie 0, market 2.

  57. Dblwyo says:

    Matt (& Towlie) – thanks. So this is going to be drip,drip, drip on the bad news ? And financials will gyrate lower as reality slowly sinks in ? And then spreads into the rest of the market ?
    This’ll be fun. You guys and your fellow traders may be the only bunch happy to have storm waves to surf.

  58. K says:

    Shaishen thanks for the info and the link. i got burned once in an IPO (blackstone group if i recall) so that’s why i asked for an opinion

  59. George says:

    Matt;

    Thanks for your assesment of that chart. I looked up cup-and-handle but I still couldn’t spot one on my own. I believe experience is a necessity with chart patterns.

    I really appreciate the chart links folks are posting. It’s great to get different perspectives.

  60. Dressguard says:

    The world is going under and nobody gives a damn shit. Strange! :-)

  61. K says:

    George the latest link about java that i posted is what i used for about 5 other trades.
    here’s the result of them.
    http://i38.tinypic.com/y1fty.png

    2/5 isn;t bad considering one i got 30% gains.
    am still looking for my trading style but have a look.

  62. George says:

    towelie;

    Thanks for your feedback and analysis on those charts.

    How interesting your comment about “self-fulfilling prophecy”. I began believing that a long time ago when I saw the cycle patterns in the stochastic and MACD. It’s almost like you can tell traders are using those exclusively – like me (lol). That must be the same situation for other indicators and patterns, too.

    Some cycles don’t work out. A light bulb went off when I asked Matt when there was a pattern within a pattern, which should be followed?

    Matt’s response:

    “That’s a good question. My technical-analysis textbook says to only play on the side of the major trend. So, in a bull market, you only play on the long side, and in a bear market only the short side. And that is probably a sensible approach for most investors.

    “But if you are a skilled day-trader, bear markets offer a series of very sharp counter-trend rallies as excess short-interest is periodically purged. If you can do it, I don’t see anything wrong with trying to catch those rallies though it is probably a good idea to keep your time-horizons short.

    Matt”

  63. K says:

    hmm oil fell below $100 that should lift the markets i think. i know lately oil hasn;t had an effect but that’s a huge milestone. no?

  64. George says:

    K;

    The way you are playing those, like the JAVA setup, is similar to one of the ways I use an intraday scalp setup. For a longer-term daily swing trade on this, my method would wait until the weekly stochastic turned positive.

    Man, JAVA looks good with the move down this stock has made.

    Nice going. I may help you a bit.

  65. K says:

    i’ve already made a few percentage points on java but i ignored my technicals. so it wasn;t much.

    now i’m hoping to get in monday if i have a chance.
    maybe make my technical success 3/6 :P

  66. K says:

    @George – “For a longer-term daily swing trade on this, my method would wait until the weekly stochastic turned positive.”

    Does java look good to you one the weekly stochastic? and which stochastic indicator do you most use? fast, slow or full? i usually look at the full stoch.

  67. George says:

    One other thing before I go out and cut grass (ugh).

    I follow http://www.stocktiger.com/

    This is a FREE breakout trading service. It has a daily video, excellent weekly newsletter. They have daily picks where stocks are either breaking out to the upside or downside. I normally take their picks, in for one day and out the same. My average has always made a profit every week.

    You can go to the website and get their written weekly newsletter and have it e-mailed to you if you want.

    The guy that runs it sounds American but lives in Moscow from what I can gather.

    And it’s FREE – Just like Matt-gic’s blog. Best of both worlds.

  68. K says:

    hmm sept 5 java signaled a triple bottom breakdown in the p&F chart.

  69. K says:

    Ahh where could I be without MAtt-gic blog and all the links am being provided on here.

  70. George says:

    K;

    I am writing a response for your question on JAVA.

    I have not completed it and I need to go to my daughter’s and fix her lawn mower.

    I use 8,3 slow stochastic settings on Stockcharts weekly. Normally, the higher the timeframe, the lower the settings to gain more sensitivity. I use any setting that allows me to follow previous price action accurately.

    More later.

  71. Mechie says:

    George – thanks for the Stocktiger link. Some good resources there.

    M

  72. K says:

    So i guess stocktiger Buy today sell tomorrow will be a good play? maybe keep a week. i’ll look into it but JAVA first.

    thanks again George. Very helpful link

  73. K says:

    CCE is another i wanted to buy… coca cola enterprises.

    i have missed my indicators and i might get into it a bit too late. thanks to stockcharts payment issues. bleh.