Here is just a very small excerpt from this weekend’s Weekly Strategy Session, which I published and sent out to members on Sunday, putting the current market in perspective.
Keep in mind, the rest of the Strategy Session is devoted to specific, actionable trading ideas with price levels to watch, in addition to educational material and broad market context in the form of thorough current relevant issue coverage.
In last weekend’s Strategy Session, we looked at price puncturing the upper Bollinger Band of the quarterly chart for the S&P 500 Index, stretching back several decades. We knew that technical development was an exceedingly rare one, even in powerful bull markets, which drove home the point that the stock market was quite extended from a long-term perspective.
At the same time, however, we also noted that the daily timeframe was surprisingly not quite as textbook overbought as you might imagine. So, let us update that dynamic now but with a fresh twist.
Currently, the daily timeframe of the S&P (spanning days, weeks, several months) is categorically nowhere close to being overbought by virtually any technical indicator. In fact, according to the NYSE McClellan Oscillator (“NYMO”), which is a simple market breadth indicator tool, we are actually very close to becoming oversold on the daily timeframe.
Generally speaking, when NYMO is above zero it tends to indicate bullishness for stocks, and below zero, bearishness. However, extreme readings can indicate overbought or oversold conditions. Above 50 is considered to be overbought, while below -50 is considered oversold.
Here, you can see that NYMO closed last week out at -40.90, indicating it is in bearish territory and close to entering oversold.
At the same time, however, zooming out to the weekly chart of the S&P 500 (spanning weeks, months, even several quarters), the top pane of the chart below indicates that the RSI is still in overbought territory despite last week’s downside reversal and subsequent selling.
For reference, the RSI is simply the Relative Strength Index used to identify changes in technical momentum. Above 50 is generally considered a bullish RSI, with above 70 viewed as overbought. Trending below 50 is considered a bearish RSI pattern, with below 30 considered oversold. In both instances, below, we are looking at weekly chart RSI’s over 80, indicating wildly overbought conditions.
Here, we are have a weekly RSI for the S&P which finished last week at 71.26, indicating still overbought conditions.
So, on the one hand, the very long-term, uniquely stretched conditions in the market have yet to be alleviated. But on the other hand, last week’s selling and volatility could easily have served as a sufficient short-term shakeout before we push higher yet.
Bulls will argue that quickly becoming close to oversold on the daily timeframe means the powerful long-term uptrend remains intact and will push higher yet. Bears will counter that the still-overbought weekly RSI on the S&P leaves plenty of room for a true price correction, especially now that we have seen a reversal.
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(As a reminder, members of the 12631 Trading Service inside The PPT receive the Strategy Session included in their membership at no additional cost each and every weekend.)
