By Jeff Clark – the editor of the Jeff Clark Trader
If you needed just another reason or two to be cautious after the market’s big rally in April, then pay attention to the McClellan Oscillators for the NASDAQ (NAMO) and New York Stock Exchange (NYMO).
The oscillators are momentum indicators that help to identify overbought and oversold conditions, and warn traders of the potential for a reversal in the markets. The oscillators are considered “extremely oversold” when they drop below -60. They’re “extremely overbought” when they rally above +60.
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As you can tell from the following charts, both the NAMO and the NYMO have gone from extremely oversold to extremely overbought in just the past several weeks…
Both oscillators hit their most oversold levels of the year in mid-March. And, they both closed near the most overbought levels of the past year on Wednesday.
Of course, that doesn’t mean the indicators can’t get even more overbought. But, just as selling stocks into oversold conditions in mid-March has proven to be a very bad idea, buying stocks into the current overbought conditions is probably a bad idea as well.
The bullish looking pattern on the 60-minute chart of the S&P 500 that we looked at on Monday reached its target on Wednesday. The oversold bounce we expected to happen in April has played out as well, and the S&P 500 closed yesterday right on its 20-month exponential moving average line (EMA). In the process, the market has created extremely overbought conditions on momentum indicators like the NYMO and NAMO.
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 in the weeks ahead.
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Whichever way the market moves, traders need to be ready. But, we’re in volatile times and these murky waters can be hard to navigate.
Because of this, every Monday before market open, I’ve been recording a live-streamed Crash Course. I give viewers a look at the moves I see coming, and the essential techniques that I’ll be using throughout the week.
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