Tuesday, June 19, 2012

Very Positive Action, But Extreme Levels Mean Caution is Warranted

The action of the past three days has been great - no argument there whatsoever.  We've have a few IBD-type follow-through days.  Individual stocks have had nice moves that for the most part have held up well.  All of my timing numbers have turned positive (first time since beginning of May) with the one exception of the main breadth signal, which should turn to a buy soon assuming we don't have any massive selling.  I am bullish and hopeful this rally can continue for the rest of this summer.

HOWEVER, now is most likely not the time to be aggressively buying stocks.  Based on my indicators, you're late to the party and there is a good chance you will get yourself in trouble if you chase things here.   I have two charts for you to check out tonight.  The first is the McClellan Oscillator (T2106 in TC2000).  We closed at +321, a level that has only been approached four other times over the last two years.



Yes, overbought can become more overbought and we could indeed keep squeezing higher over the next few days, but when I looked at those extreme levels above and matched it up to a daily Nasdaq chart, I found that a quick, sharp pullback came three out of four of those times the following session.  The only time a pullback did not immediately occur was about one year ago on July 1 when the market had two calm sessions, one more squeeze higher, and then rolled over hard for a week.

All Charts from TC2000, Courtesy of Worden Brothers, Inc.

Once again, I am not trying to rain on the bulls' parade here - just giving a word of warning.  Some rest here is normal and healthy and I will be looking to buy a pullback as long as it is not some crazy massive selloff.  Lots of individual charts are showing potential as well but need rest too.  I am in cash right now after playing the long side the past two days and will wait for the market to present a less-risky buy point for me to restart positions.   Hopefully by the beginning of next week, we'll indeed be looking at that opportunity.

5 comments:

elingford roban said...

This post echoes my sentiments exactly! Great job and great read!

Michael Kuhns said...

Put a bollinger band on the Maclellan and you get an even more interesting picture... It ALWAYS retraces if you get a hit to the outer band on the weekly. Maybe not this week, but certainly next.

Michael Kuhns said...

Put a bollinger band on the McClelland weekly and you see an interesting picture. Every time it hits an outer band, it retraces. Maybe not this week, but certainly next...

Harlan said...

Nice article, just what we need. A good pullback to relieve the overbought conditions of the RSI and full stohs on daily index charts (60 min time freq. too) just in time for the end of quarter pump so the media can go see? The quarter wasn't that bad

Outstanding!

Anonymous said...

Great read and thank you!