Overbought Conditions Alleviated

The signal discussed in my last article marked the recent high on June 19 perfectly, and the drop of approximately 50 S&P points from the high to the low on Monday (June 25) is enough for me to no longer consider this signal to be relevant anymore. In fact, the reaction to the NYMO sell signal has been more bullish than not as you’ll see below.

Since the reading of 80 which marked extreme short term overbought conditions, the oscillator has settled back in to the complex structure above zero – this suggests there is more rally to come in the next few weeks. The fact that the market was able to shake off the reading of 80 without sending the oscillator below the zero line is an intermediate term bull signal.

As I noted the last time I showed this chart, never before during the last three years have we seen the kind of relentless selling in the summation index that we experienced during April, May, and June of this year. The clear positive divergences I have highlighted from the lows in 2010 and 2011 does not appear likely to repeat this year unless we see another significant wave of selling in the second half of the year. I speculated in an earlier article that given the unusually aggressive selling this year compared to 2010 and 2011, that divergence may not be necessary and the market appears to have confirmed that view. Considering the selling pressure in the summation index over the last three months and that we reached levels which marked lows for the year in 2010 and 2011, this chart contains far more intermediate term positives than it does negatives. This indicator is a great reason to be bullish over the next few months in my opinion.

After briefly shorting the market following the NYMO sell signal discussed earlier, I entered some fresh long positions today in mining stocks – specifically EXK AG NGD SLW. I believe the GDX low from mid-May will hold and if that view is accurate, the recent pullback presents a good buying opportunity in the mining space. Given that some quality names like EXK are rapidly approaching their mid-May lows, it is imperative that the sector turn higher over the next few days if a much larger sell-off is to be avoided. The key triple bottom of 1525 on gold was already tested last month and now silver is testing it’s equivalent level of 26.18 – if gold/silver are headed for large collapses, then it will most likely begin very soon as silver fails at this key support. If instead silver can turn higher, both metals will have successfully tested significant long term support levels which could entice new buyers that are encouraged by this resiliency. There are good reasons to believe both views I think, though the opportunity to buy miners again this close to the mid-May panic lows presents a very favorable risk/reward setup.

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