Overbought?

I seem to hear the term overbought a lot these days.  Personally, I believe it’s an overused word that is misleading and dangerous.  When I was coming up as a trader, I would hear that term, and it would damage my ability to evaluate a chart objectively.  It would bias my view of a stock or the overall market creating a couple of nasty problems.  1. I would be fearful of a fall not entering good trade setups and then have to watch from the sidelines as they rallied.  Or  2.  I would convince myself I needed to get short and fight the market.  Both cost me a lot of money!

The solution?  Ignore all the noise and form your own opinion with a focus on price action.  Talking heads, analysts or stock gurus don’t care about your money.  They rarely are called on the carpet for being wrong and even if they are the damage to your account is already done.  You’re the boss.  Make decisions based on what you see not what others might think.  After all, no one cares about your money more than you do!

On the Calendar

There are three important and potentially market-moving reports on the Economic Calendar today.  The first is the PMI Composite Flash at 9:45 AM Eastern.  Forecasters expect another strong showing of 54.4 composite, 54.0 services, and 55.0 manufacturing.  At 10:00 AM is the Existing Home Sales numbers is expecting a very solid 5.750 million annualized rate for December.  The strong sales have driven down housing supplies to only 3.4 months of standing inventory.  Then at 10:30 is the EIA Petroleum Status report which has shown a steady downtrend in supplies with the winter demand increases.  There is no forward forecast of oil supply numbers.  However, looking at strong gains in oil stock prices, investors seem confident that supplies will continue to decline.

The Earnings Calendar ramps up today with just over 100 companies expected to report today.  To protect your capital, it’s imperative that all traders have a plan for earnings on anything they own or are thinking of buying.  Failure to do so can result in painful lessons.  Make it a habit of your daily preparation!

Action Plan

Another day of new record highs closes in the SPY, QQQ, and IWM.  The DIA saw choppy 2-sided price action eventually closing down a whopping 11-cents.  There seems to nothing that can stop this raging bull run.  This morning the Futures are pointing to a bullish open and currently showing a possible gap up of nearly Dow 60 points at the open.  Of course, that could change substantially with all the earnings reports before the open.

Although the market seems very extended, there are currently no clues in price action suggesting that is about to change.  Stay with the trend but don’t chase.  Only enter stocks with good risk/reward ratios at or near price support levels.  Also, keep in mind as earnings reports ramp up intraday volatility can also quickly rise.  Whipsaws and swift reveals are common.

Trade Wisely,

Doug