When I look at the 5-year SPY chart, I think it can only be viewed as bullish. But, I’m still in this same mode that I have been in the last few weeks. RSI has been over 70 since about July 20th and this momentum is simply not sustainable. I cannot get long until there is a pullback or a sideways consolidation to burn off the overbought conditions. The risk of a moderate pullback (lets say to 950) is elevated until momentum burns off.
I have been slowly increasing the amount I have invested over the past couple of weeks. I am now 13% invested. Most of my new additions have been small short positions in these “irrational long stocks.” These “irrational longs” fit into two categories. The first is the “RSI 93″ category which is a mechanical process whereby I short a stock in the event RSI hits 93. The second category is stocks which generally have RSI above 80-85 which are running up against resistance. This strategy may seem overly simple but it is worth noting that this strategy would not work in most markets. It requires a special market which is heavily overbought.
As expected, the QQQQs have hit resistance at $40. What we don’t know is whether this is a top (whether short term or long term) or whether it is a sideways consolidation before a continued move higher. Because I’m mainly just shorting “irrational longs” right now, all I need is a little pullback to allow me to cover these short positions.
Now that earnings season is over, there are also more opportunities on the long side.
A few long ideas:
Resistance on ADM held at $29 since December. We recently had a breakout over $29 but the stock has pulled back to $29. If we get a second breakout on volume I will be interested in this one to the long side.
With the recent AIG spike and the spike in Freddie Mac after hours on Friday, it looks like C might be the next government owned company to move higher. Notice the increase in volume on the recent move up to resistance at $4. This could be a good junk long candidate on a breakout over $4.
I’m still waiting for this ascending triangle to complete on AMCC. I would consider buying this at about $7.50 in anticipation of the breakout (with a tight stop) or I’ll wait for it to complete and wait for a breakout over $8.50.
Irrational longs which could become good short candidates:
RSI on DST has run up to 87. We need one more big move to send this into the 90s. I would play this one as an RSI 93 trade.
BEN should be very vulnerable if it hits $100. There is a nice line of resistance there and RSI is at 85.