Stock Market Great Reversal And Yes, Overbought Again.....

By: Jack_Steiman

No one who is bullish would complain about today's great reversal off the lows which allowed the market to close green across the board. In fact, the S&P 500 made a perfect, and I mean Perfect, back test of the 1151 breakout with an 1152 print just after the opening bell gap down. From that point forward those determined bulls made an amazing run higher throughout the rest of the day to finish with decent gains on solid reversal volume.

No complaints for sure if you're a bull, unless you're a bull like I am, because once we went back up we saw all of the major index charts blast over 70 RSI yet again. It doesn't mean we're about to fall again but it does make you wonder just how long we can stay this overbought without a more pronounced pullback to come in the very near future. We all know the overbought story by now. It's old in terms of longevity and it hasn't really hit the market yet, but at some point it will. There is no question about that, but the more immediate question is from what price. This is a bull market and bull markets can stay overbought a long time as we know. As far as today goes, you have to love that the bulls, if you're bullish, defended the breakout on the S&P 500 at 1151. A strong day for them for sure.

The market closed poorly allowing for a good full day’s worth of selling and this should be just the beginning. We are no longer overbought on the daily charts as all RSI’s are now below 70, but we need deeper selling to set up a better base to move up from again. When you get very overbought on the daily charts for a prolonged period, it usually takes a little longer to finish off the selling once it kicks in. No exception here I would think. Some 60-minute charts are getting close to oversold but not quite there yet. A little bounce can occur but we will need to move a bit lower still.

The health care bill passed by three votes last night, 216 votes needed and the tally got to 219. This was achieved after four democrats changed their minds on abortion tax issues. This topic of the passage or not of this bill and what it would do to the market was getting really annoying. Once it's discussed so much, the effect the masses believed they would see would, of course, never come to pass. It was guaranteed by just about everyone that if it was passed the market would get sick. Wow! Really?

The only reason the market may get sick is because of overbought. Nothing more and nothing less. So when we were down this morning pre-market everyone was talking that it was because of the passage of the health bill. And these people actually get paid? If the health care bill was a headache the Dow futures wouldn't have been down 55 points. It would have been down 250/300 points. I get so frustrated that the masses rarely, if ever, are told the truth, either through intentional forces or lack of general knowledge. Today, it was simply a lack of knowledge. It is what it is.

Speaking of overbought. Here we go again folks. With today's rally we are overbought again and this means some chopping around is likely again. It doesn't mean we can't blast higher because we're in a bull market and you must have exposure in this type of market. However, it does mean we can see days of up 25 Nasdaq and down 25 Nasdaq. Impossible to know what to expect day to day but you buy the best set ups and let them work over time. That’s the best way I can put it when playing such as we have here in front of us now. I will tell you that if you get super aggressive it will come back to bite you in all likelihood. Play the set ups but nothing in terms of long-term portfolios.

We now know the bulls went out of their way to defend 1151 today. What is the one thing that can derail it short-term? Overseas debt troubles such as Turkey, etc. Really bad news that we don't know about yet can come along and knock this market down for a while, and that's yet another reason not to go nuts here with too many long plays. Good exposure but not all in. If we get the type of news that takes out 1151, the market will find strong support at 11340 along with 2325 Nasdaq. You must simply follow the trend in place. It's up overall. Shorting makes little sense to me now. Some day it'll be the right day. Not now. Let's take this day to day and play what we see.

Peace

Jack

Jack Steiman is author of SwingTradeOnline.com ( www.swingtradeonline.com ). Former columnist for TheStreet.com, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

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