Finally Overbought

The market will finally be short term overbought at the end of the day on Monday. Many are likely wondering how it is that we are not overbought already. I measure overbought as a function of time rather than price. Monday will be the tenth trading day of this rally and strong moves tend to get exhausted after ten trading days.

A textbook scenario would be to see a strong day on Monday followed by a Turnaround Tuesday and more corrective action for the balance of the week.  However, in recent years we have seen strong overbought readings like the one we are experiencing get worked off with sideways action. Additionally, the coming week is option expiration and expiration often serves to perpetuate a strong bullish trend. Regardless, the market should have  a more difficult time with the upside by Tuesday.

A strong overbought reading like the one we are experiencing has bullish intermediate term implications. Even if we do correct for a few days we are likely to rally again afterwards. There is a lot of fuel for a rally as most market participants are still positioned conservatively if not outright bearishly. If market participants decide to turn bullish for some reason we will be a lot higher by Thanksgiving.

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