Wednesday, June 1, 2011

Overbought Going in to the 1st of the Month

There was a lot of research to consider for me to discuss today, but I decided to stick with the theme we’ve been examining over the last few days, which is seasonality. In my last post I discussed the combination of the bullish Memorial week edge and the 1st of the month edge. I showed that together they appeared even more powerful than in isolation.

But how do bullish seasonal tendencies hold up when the market is short-term overbought as it is now? Perhaps the move simply came earlier than usual. One way to measure short-term overbought is to see if the market has already closed higher for at least 2 days in a row. The study below has been shown in the subscriber letter a number of times. It looks at just that scenario.

If you can spot a consistent and tradable edge here then your eyesight is much better than mine. Under these circumstances “1st of the month” no longer appears bullish. At the least this would appear to dampen Wednesday’s seasonally bullish inclinations.

So perhaps today action isn’t as black and white as it appeared in yesterday’s study. But then again – it never is. And isn't that what makes the market so interesting?

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