Stock Market Higher..Getting Overbought Again....

Stock-Markets / Stock Markets 2010 Dec 11, 2010 - 06:48 AM GMT

The market continues its slow and steady grind higher. Small candle sticks along the way aren't great, but it is managing to move higher. The up trend continuing, but unfortunately, the daily charts are all near, or actually at, overbought on those daily charts with stochastic's in the 90's and RSI's in the 68 to 74 range. 74 on the iShares Russell 2000 Index (IWM), or small caps, while the Nasdaq is basically at 70. S&P 500 and Dow right there as well. Grinding new highs as we move in to overbought isn't the best action for the bulls. We are making slight new breakouts but not in a fashion that suggests too much more from here. The NDX has major resistance at 2239, or roughly 1%, from here. Not sure we can get it, but you give the benefit of the doubt to the bulls due to the overall up trend in place.

At some point, however, we'll need to start pulling back once again, thus, I don't think you should expect another strong leg higher at this point in time. You'll need more patience. Again, playing those good bases and waiting for them to make their moves over time is the best way to play this type of market. It'll test your patience, but that's what this market is giving for now and may continue on this path for weeks, if not longer than that. Bottom line is yes, we're in a good market, but yes, we are about to get extremely overbought once again, and thus, selling is coming soon to a market near you. Hopefully, we can grind higher a bit longer before that kicks in.

So, when this selling comes many will think the market has seen its top. I don't think that's the case at all. I think the market will be able to move higher again in time, probably quite a bit so, but first the selling needs to come in and spoil the feel good emotions that exist at the moment. Sentiment is getting a bit out of hand here as put-call readings are starting to get too low on a daily basis. The 10-day put call reading very close to where tops take place for the short-term so as to breathe in a little anxiety and remove the enthusiasm.

Markets can stay overbought a long time, but the key is when it snaps, it'll snap hard again as it did off the top at 1228 previously. The longer we grind higher the more intense the snap down will have to be. All of this would remove some of the current frothy sentiment, which would allow for that next stronger leg up over time. Sentiment starting the week was slightly over 35%. Will it be higher next week? It's likely to be so. This market is going to have to unwind the sentiment at some point, so be prepared for that when we get that candle stick that says the short-term top has been made. That has not occurred yet, but is coming soon as those overbought conditions suggest.

The financials are holding up this market the best by far. They have been very powerful the past week or so. It's been a very strange journey for this group of stocks. The Direxion Daily Financial Bull 3X Shares (FAS), or proxy ETF for the financials, had made a massive breakout over $24 several weeks back. It ran to $27 before running out of gas. That's normal enough. Stocks get overbought and pull back, sometimes deeply enough to test back where it broke out from. The FAS ran back to $24 and looked ready to run up again only to collapse back below it and run lower all the way down to $21. Ouch! The breakout was a head fake. Or was it?

Miraculously, it ran back to $24, stalled a bit, and then broke out again. You have to laugh as this just doesn't happen very often. Great to see it though as this represented a change in character not seen for quite some time. If this can hold above $24 on the coming market sell off from overbought, it will represent a real turning point for this group of long-term under performers. A group that has been in a bear market seemingly forever. It would be awesome to see these change from bear to bull officially. It's working on it, but I'll be more convinced once we see how they hold up in to future market sell off. It is also showing an inverse pattern that measures to $33. Let's just make sure it can hold above $24 down the road.

There is no question about where this market is from the perspective of bull or bear. You can rant and rave all you want about how unfair it is for this market to be trending northward due to the headaches out there in the world from a fundamental point of view. I get it and can't blame any one of the bears out there for feeling frustrated. Bottom line is, we are in a bull phase or bullish trend, whatever you choose to call it. Maybe it would help you if you didn't tie in bull or bear market and simply look at any given point in time as a market phase. Don't get tied to a feeling emotionally about what should be. A real waste of your time if you do that too often. Go with the market message, which overall is bullish, but will need some selling not too far down the road to cool off sentiment.

The thing is, timing that is never easy. At overbought on the daily charts we may not get that snap down quite yet. It may only be a regular pullback at first. The deeper snap may come many weeks down the road. When a market is in an overall up trend, timing the sentiment moment is never an easy chore. Stick with the market's message, which is clear, but will need some tweaking to remove sentiment at some point. Best to play with, and not against, the overall trend.

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.

Mr. Steiman's commentaries and index analysis represent his own opinions and should not be relied upon for purposes of effecting securities transactions or other investing strategies, nor should they be construed as an offer or solicitation of an offer to sell or buy any security. You should not interpret Mr. Steiman's opinions as constitutinginvestment advice. Trades mentioned on the site are hypothetical, not actual, positions.

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