Short-Term Reprieve in DIA

Last week I mentioned the probability of a short-term decline in the Nasdaq 100 (QQQQ) due to the bearish seasonality, but more importantly, the short-term “very overbought” state of the tech-heavy index. By Friday, QQQQ had pushed to a short-term “oversold” state. However, the Dow (DIA) advanced and actually ended up slightly higher for the week. It was the only major benchmark to close the week higher. Moreover, it was the eighth straight week of gains for the blue-chip index.

The trading day after options expiration is historically bearish, but given the short-term oversold nature of QQQQ, I was not certain how much further the tech-heavy index could decline over the short-term, particularly with a RSI (2) of roughly 4. Monday, QQQQ, as well as the rest of the market, bounced - which, as I mentioned, was not unexpected. The advance has left the already short-term “overbought” Dow (DIA) to a short-term “very overbought” reading and a RSI (2) of 98.3.

After both hit 52-week highs two weeks ago, there has been a recent divergence between DIA and QQQQ, and this price action could be telling over the short-term. Typically, this spells trouble for the market over the short-term. This same type of price action has happened three times over the past thirty years and each time the market moved lower with an average loss of 3.6% over the next two months. Couple that with the recent jump in CFSB (Fear Barometer) and the VIX (both suggest a short-term reprieve), and I think the argument for a short-term reprieve in the blue-chip DIA could easily be made.

Of course, as we all know, there are no guarantees in trading, but with a short-term oversold reading in my High-Probability, Mean-Reversion indicator, coupled with a RSI (2) of 98.3, there is a good chance that I could place another trade in the High-Probability, Mean-Reversion indicator today.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in DIA over the next 72 hours.