If you needed another reason or two to be cautious after the market’s big rally to kick off October, then pay attention to the McClellan Oscillators for the Nasdaq (NAMO) and New York Stock Exchange (NYMO).
The oscillators are momentum indicators that help identify overbought/oversold conditions, and warn traders of the potential for a reversal in the markets (click here to check out our new free resources page, including our comprehensive glossary).
The oscillators are considered “extremely oversold” when they drop below -60. They’re “extremely overbought” when they rally above +60.
As you can tell from the following charts, both the NAMO and the NYMO have gone from extremely oversold two weeks ago, to extremely overbought today…
Both oscillators hit extremely oversold levels during the September decline. And, they both closed in overbought territory last Thursday.
Of course, that doesn’t mean the indicators can’t get even more overbought. But, just as selling stocks into oversold conditions in late September has proven to be a bad idea, buying stocks into the current overbought conditions is probably a bad idea as well.
Add to this the inflated premiums in Volatility Index call option prices, the potential bottoming pattern in the U.S. dollar, the tepid action in the junk bond market, and the bearish seasonal tendency of the stock market in October – we have plenty of reasons to be cautious.
This is not the time to be pressing bets on the long side by buying more stocks. In fact, now is probably a good time to trim some positions and take some money off the table.
Stock prices are likely to be lower two weeks from now than where they are today.
Best regards and good trading,
Reader Mailbag
In today’s mailbag, Jeff Clark Trader member Barbara shares her experience trading with Jeff’s help…
I’m new, still learning, and have purchased several of your subscriptions. I’ve watched your presentations many times and appreciate your amazing story with obvious skill. I’m determined to follow through, and I know I have a great coach in you.
With much appreciation, respect, and your help – I WILL get there.
– Barbara
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming – and send us any questions – at feedback@jeffclarktrader.com.