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Watching the Range



I wasn't going to write anything today, but in doing my numbers this morning I came across some pretty dramatic readings I wanted to pass along.

As you know each day I track the percentage of overbought and oversold components of the S&P and Nasdaq 100 indices (OEX & NDX). As of Monday's close, 91% of the OEX and 84% of the NDX were in overbought territory.

The OEX reading really caught my attention because it has never been in the 80s, much less the 90s after any prior surges in this bear market. Basically, this rally was the strongest and sharpest countertrend rally to date in the context of the current bear market -- and it didn't even begin from an oversold level the way prior bounces did. To put it in perspective, the OEX component overbought percentage was 69% in the bounce that followed the Sept. 11 attacks.

Yesterday, I outlined how the S&P 500 (SPX) is in the middle of a very well-defined trading range that began last June. This type of overbought reading on the OEX means a major move is coming. The obvious guess would be that the next major move could be down because the market is overbought in the context of a bear market and trend of lower highs and lower lows. While that is true, the strength and viciousness of the rally -- despite not having the intermediate-term indicators lined up -- might be a sign that there is enough underlying demand for stocks to cause another big leg up once the near-term overbought condition is alleviated.

My point is that once the market moves out of the current range, the ensuing move should be large enough (either up or down) that waiting for it to happen first makes a lot of sense before making any major commitment to either direction.

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