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Thursday
Feb212013

From Overbought to Neutral

Until today, the S&P 500 had been trading in overbought territory (greater than one standard deviation above its 50-day moving average) since the first trading day of the year.  Today's continuation of the big decline we saw yesterday has finally pulled the S&P back into neutral territory.  As shown below, eight of ten sectors are now neutral as well, whereas last week nine of ten were overbought.  The only sectors that remain overbought are both defensives -- Consumer Staples and Utilities.

Below are one-year trading range charts for the S&P 500 and its ten sectors.  The blue shading represents each sector's "normal" trading range, which is between one standard deviation above and below its 50-day moving average.  The blue shading in the charts below is the same as the white area in the table above.  The red shading represents between one and two standard deviations above the sector's 50-day moving average, and moves into or above the red zone are considered overbought.  The green shading represents between one and two standard deviations below the sector's 50-day moving average, and moves into or below the green zone are considered oversold.  The red and green shadings in the chart below correspond to the light red and light green shading in the table above.  Moves outside of the red and green zones in the charts below represent extreme overbought or oversold territory, and these correspond to the dark red and dark green shadings in the table above.

As shown, while the S&P 500 is now back in neutral territory, it's still well above its 50-day moving average, and its uptrend remains in place.  Until the 50-day breaks, traders should treat this as a pullback within an uptrending market.

Most sectors remain in strong uptrends as well, but obviously some have gotten hit harder than others over the last two days.  The Materials sector stands out significantly in the charts below, because it broke right through its 50-day and is now close to oversold territory.  It has been awhile since any sector has been oversold, but right now Materials is the closest.  Technology also stands out because it is now below its 50-day as well.  For now its short-term uptrend remains in place, but another one percent decline or so will break this uptrend.

The one sector that has completely brushed off this market decline is Consumer Staples.  As shown, the sector has gone parabolic and is right at extreme overbought territory.  Rest assured that this won't last forever.