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Overbought percentage - part 2

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Yesterday's commentary surrounded the overbought percentage in the NASDAQ 100 (NDX) and S&P 100 (OEX). The percentage-overbought reading was reaching toward an extreme territory. Today, that percentage is extraordinarily extreme. The percentage overbought in the NAZ (using a 14-period stochastic) currently stands at 86%. On the surface, one would think that is a bad thing.

The last time the reading was that high was October 16th, 2001. The reading was immediately followed by a 6.4% correction in the NDX. That correction was followed by a 31% gain over the next six weeks. Again, the only problem I have is that there were so many extreme oversold readings preceding that intermediate-term low, that quite simply just don't exist right now.

So where does that leave me? Just looking at the stat, you got to be bullish AFTER a nasty day or two right?. When I take into account that there were very few extreme oversold readings on intermediate-term indicators prior to last Wednesday's low, I would simply open up the possibility that the recent low may be sustainable.

I thought the market could have a one or two day wonder due to the prolonged weakness from the January high, but I certainly didn't expect a gain of nearly 10% in the S&P 500 and 12% gain in the NDX. That said, as I have outlined over the last couple of days, the intermediate-term resolutions needed to change my view have not kicked in. Certain factors, like the above NDX overbought history, suggest the possibility of a more sustainable low. Other factors that I have outlined et nausea suggests this recent rally is a bear trap. In my view, neither framework can - or should be - ignored.

No matter how one looks at it, the surge from last week's low was very powerful and needs to be corrected. It will be through the eyes of that correction and the cause of it that determines the next course of action. Despite popular opinion, we don't need to make an investment decision on the next tick. Clearly, I missed the surge off the low, but I would rather not make one mistake into two by saying I am positive on the tape AFTER a 10% move and historically extreme overbought readings.

I would like to throw a shout out to our boyz in the Weapons Company, 1st Light Armored Reconnaissance Battalion, based out of Camp Pendleton, CA. One of their Sergeant's sister is one nice minyan! Stay safe boyz and thanks.

No positions in stocks mentioned.
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