Following up on yesterday's low volume melt-up, we saw more of the same today. Stocks rose steadily throughout the session but with volume coming in light and even lower than yesterday's light totals in some cases, I can't give much credence to this action. Yes, the indices did get back above their 50 day moving averages today, but they did the same thing back on August 28 (check out the S&P chart) and all it led to at that time was a historic sell-off in September and October. I have used the comparison between August and right now and I still think it is applicable.
The McClellan Oscillator is a good overbought/oversold indicator in my opinion, and I have shown it before this year several times. Anything over +200 signals overbought. Right now, it is at 263. The last two times it got over 250 were 11/4/08 (+259) and 12/8/08 (+279). The two days that followed 11/4/08, the market fell about 10%. Following 12/8/08, the market fell from a high of 920 to the bottom of this current range around 850.
The RSI(2) overbought/oversold indicator used by Woodshedder at IBankcoin.com is also at historically high levels on both the Nasdaq and S&P. On both these indices, the RSI(2) is close to or in some cases above the levels reached on 11/4/08 and 11/28/08. Check out what happened after each of these dates. Not really good.
S&P 500 with RSI
The fact that all of these overbought conditions were setup on very weak holiday volume, not to mention that we are at or quickly approaching the top of this trading range, leads to me believe the market is setting up for a nice pullback soon. Perhaps this time is different and the low volume doesn't matter this time. I will put my faith more in the market's recent historical behavior rather than hope that things have suddenly changed, but that's just me. I still don't see a ton of great setups on the long side and most of the ones I have been watching did virtually nothing today. I see the past few days as hedge and mutual funds attempting to paint the tape for the year as best they can so perhaps their performance stats won't look quite as bad to their investors as it may have before this week. In my opinion, we are either setting up for the mother of all rallies that starts a new bull market in my opinion (very unlikely) or an end of this bear market rally that leads to at least a testing of the recent lows and possibly new lows overall (much more likely).
I didn't make any trades because I could see us melting up a bit more Friday when volume could still be rather light, but if I have the opportunity I may look to get short very soon. The only thing that worries me is that most traders seem to be expecting a sell off as well. But if it looks like a rat and smells like a rat, then it is probably a rat. Be very careful chasing longs here unless volume comes in quickly and tighten up those short lists. That's what I plan on doing.
I hope you all have a great and healthy 2009. It has been about a year now for this blog, and I hope it has been beneficial in some way to everyone reading this. As time permits, I hope to continue posting the nightly commentaries and videos as I have done this year and perhaps expand into some new areas, but we'll have to see how that goes. I have lots of ideas but it really depends on how much time I have because family always comes first. I think I have improved as a trader and a writer as the year has progressed (at least I hope so), and I hope most of you have been able to improve as well. 2008 will go down as a historically tough year but if you could survive this type of market, you can probably survive anything. Here's to a 2009 filled with more improvement, more hard work, and more successful trading regardless of what Mr. Market throws at us. Take care and have a great new year!!