Wednesday, August 29, 2018

On the verge of a "good overbought" rally, or market stall?

Mid-week market update: As the market broke out through the round number 2900 level, I am indebted to Urban Carmel and others for pointing out that the index is testing a key uptrend line.

There are a number of common elements of the current market conditions to past tests of the uptrend:
  • By definition, all episodes either tested or approached trend line resistance.
  • Most were at or above their upper Bollinger Bands (BB). Each upper BB ride lasted between 1 and 4 days. Today is day 3 of the upper BB ride.
  • All were overbought on RSI-5, with readings of 80 or more.
The key difference between the rallies in 2018, and the melt-up advances that began in late 2017 is the degree of positive breadth participation. The 2017 episodes were marked by strong breadth and momentum that exhibited themselves in a series of "good overbought" RSI-5 readings. The strong display of momentum enabled stock prices to rise even further and in a steady manner.

The key question for traders is whether the current rally turn into a "good overbought" advance, or will it stall at trend line resistance?

The full post can be found at our new site here.

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