The Markets Are in Overdrive
Thursday, April 26th, 2007
By George Leong, B.Comm. for Profit Confidential
Markets are once again in overdrive. The DOW closed higher in 11 of the 12 sessions to April 16. The near-term technical picture is bullish, as are investor sentiment and market breadth.
The high-new/low-ratio (NHNL) ratio, a measure of the number of stocks touching a new 52-week high versus the number of stocks that have declined to new 52-week lows, continues to be bullish on the NYSE. The last 24 straight sessions were above 70%, including 19 of the last 20 sessions at over 80%. The NHNL on the NASDAQ has been relatively soft, but seven of the last nine sessions were above 70%. As long as sentiment remains bullish, the stock market has a higher chance of sustainable gains.
On the NASDAQ, breadth, as indicated by the advance-decline line (A/D), has been relatively strong, with seven of the last 11 sessions above 1.0.
But given the recent rally, markets are now overbought, so we could see some near-term selling pressure,
The CBOE NASDAQ Volatility Index (VXN) — a barometer of near-term market volatility based on NASDAQ 100 index option prices — is generally viewed as a contrarian indicator. The five-day VXN has been on a decline, which could indicate a near-term top.
The five-day CBOE Volatility Index (VIX) has also been declining, and continued lower readings may suggest a near-term top.
At this point, stocks are in favor again, but you need to remain prudent and to avoid chasing gains higher due to the threat of an overbought market.
Watch for the key Q1 earnings season in progress. I advise caution and expect trading to be relatively volatile.
I continue to believe that the best approach in this market is to maintain caution and prudence. The bottom line for you should be capital preservation
Access risk capital and trade nothing else. Maintain adequate diversification in regards to market-cap, sector and geographical
exposure. We do not advise overexposure to any one stock, or dominant sector or theme. Going for the home-run winner could burn you and leave you with little capital with which to play.
This is not a buy-and-hold market but continues to be a trader’s market for the aggressive player.
Maintain appropriate stop-loss orders on longs and definitely use stop-buys on shorts.
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Tags: stock market, stock market rally
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George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.
