Bollinger Band Break Warns Market is Overbought

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The Dow Jones Industrial Average and S&P 500 both rose to a record close Tuesday. The advance was supported by European and Japanese officials’ willingness to stimulate their economies.

The health care sector led, helping push the Nasdaq higher. The iShares NASDAQ Biotechnology Index ETF (IBB) rose 2.2%. Biotech has been one of my favorite sectors in 2014, up 30% year to date.

A major catalyst for the broader market’s gains was Mario Draghi’s statement that the European Central Bank will expand its easy-money policies if needed to fight low inflation.

These measures are indications of weakness rather than strength, which may be a reason why the United States appears to be the place for foreigners to risk assets.

The Home Depot, Inc. (HD) fell 2.2% despite reporting better-than-expected earnings and revenue. Urban Outfitters, Inc. (URBN) lost 6.6% after issuing disappointing results.

Q3 earnings for S&P 500 companies are up 8.1% versus 2013. Analysts expected a gain of 4.5%.

Today, the focus will be on the weekly Mortgage Bankers Association’s purchase applications index and the release of the minutes from the Oct. 28-29 Federal Open Market Committee meeting.

At Tuesday’s close, the Dow Jones Industrial Average rose 40 points to 17,688, the S&P 500 gained 10 points at 2,052, the Nasdaq was up 31 points at 4,702, and the Russell 2000 rose 6 points to 1,170.

The NYSE’s primary market traded 731 million shares with total volume of 3.4 billion. The Nasdaq crossed 1.6 billion shares. Advancers outpaced decliners by 1.6-to-1 on the Big Board and by 1.5-to-1 on the Nasdaq.

Regular Daily Market Outlook readers know the emphasis that should be placed on significant price action. Admittedly, Tuesday’s advance, with the exception of the Russell 2000 and NYSE Composite, was impressive.

SPX Chart
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Chart Key

However, the S&P 500’s punch above the upper Bollinger Band is concerning. With almost every penetration of the upper Band so far this year, a decline occurred within a week. And this occurred while both MACD and momentum are still losing ground.

Russell 2000 Chart
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Tuesday’s session was an extraordinarily quiet one with profits being taking at the close on the worst-performing index of the year, the Russell 2000.

Conclusion

Perhaps this time I’m being too cautious. But when a major index like the S&P 500 breaks above its upper Bollinger Band, this is considered an “overbought” indication. And when an advance is supported by puny volume and breadth of just 1.5-to-1, it is almost always a signal that it can’t be sustained for long.

I recommend using trailing stops of 5% to 10% on all new and existing trading positions in order to protect against losses.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.


Article printed from InvestorPlace Media, https://investorplace.com/2014/11/daily-market-outlook-bollinger-bands-warns-sp-500-overbought/.

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