Wednesday, October 13, 2010

Pulling the Rubber Band

As I mentioned earlier this week, the market has been dancing along the 13 day moving average for this entire rally from late August.  All dips hence are bought, and the corrections only take care of near term overbought conditions - they are very short term in nature and much of it is just sideways action.  In that context, I thought it interesting to see how far the rubber band could be pulled from the trend line (the 13 day) before the (a) minor pullbacks or (b) sideways action - begins.

Sep 6th: 2.8%
Sep 13th: 2.3%
Sep 20th: 3.0%
Sep 26th: 2.3%
Oct 5th: 1.9%
Average: 2.46%

Today: 2.1%

Hence a strong surge tomorrow or Friday premarket would lead to a short term oversold condition.  That does not mean any serious selling; just the kind that either has us go sideways to let the 13 day moving average 'catch up', or minor selling that takes the S&P 500 closer to the 13 day.

Until the pattern breaks, the computers will keep playing the pattern.  Remember, they only look for patterns - they don't care about emotion or valuation.  It's irrelevant.

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