Tuesday Update: On Borrowed Time


A robust rally has cancelled out of our Pending Sells and yet has not generated a single high probability Buy Signal. Nonetheless, the market is even more overbought than it was yesterday,  the day before that, and the day before that. There have been zero instances going back at least 24 months when the market has been this overbought (or oversold) without a reversal, often a steep reversal. Case in point the mini market crash from September into December 24th. The market got severely oversold the week of December 17th, yet still dropped sharply into the December 24th low, getting more oversold each trading session. From there we have seen a solid reversal up through all of January and now into the second week of February. There is little we can do besides wait for the inevitable turn down. NO WAY WE CAN CHASE NOW. I know the system and it will not trigger long without a retracement. Once in place, the shape and size of the retracement will determine whether the the system will start triggering new Buys or Sells, or both. 

One of the most accurate overbought indicators I follow is the CBOE Put/Call ratio which is at levels last seen at two inflection points last year, once at the September highs and a second at market peak in early December, right before a 4,000 point decline in the Dow. Here is a graphic from Elliott Wave International  published just yesterday. Note the two peaks late last year and a third peak RIGHT NOW. Although we have had seven Buys in a row in the short-term premium service, including two this morning at the open (FB & EEM), this rally is on borrowed time. With the Dow above 25,000, the bullish case has to be respected, but at a minimum expect a move back down to at least work off the overbought indicators, while a decline back below 25,000, without working off the overbought conditions  would bring the bearish scenario back front and center.