Stock Market Keeps Hanging In At An Overbought Level

Stock-Markets / Stock Markets 2010 Dec 07, 2010 - 03:22 AM GMT

The market has its head down again. It refuses to pull back decently even when the oscillators say it would be best if it did. The daily charts are not quite overbought except for the mid caps, which are flashing a 70 RSI on that daily chart. The other major index charts are flashing 60's on those RSI's. The 60-minute charts, however, are overbought with RSI's again at 70 and thus you can expect a pullback at any moment, but timing it is virtually impossible with this type of overall momentum carrying through day to day. This is why some exposure is essential at all times. You can't time a pullback in this environment. When the market does pull back you'll be under water a bit but that's fine. We can deal with that. Do not be shocked when it does hit. Right about now it feels like it can't hit, but, of course, it will at some point. Catches you when you least expect it.

The market is very close to massive resistance up at 1228 on the S&P 500, and with it being overbought, it would be silly to expect a strong blast back above the old highs. The best case scenario is for the market to play a game of lateral tag while the short-term oscillators unwind and the daily oscillators stay right where they are. This would then allow the market the opportunity to move appreciably higher once again. But one step at a time here as we have to face the fact that we're overbought, and thus, must adapt to playing a little less aggressively until things set up better. Nothing is bearish here, but we do have to respect the very short-term overbought signal. It says relax and wait for better opportunities.

It'll be very important to watch those financial stocks to gain some real insight as to what's coming next. They made a wonderful breakout above 24 on ETF Direxion Daily Financial Bull 3X Shares (FAS). It ran to 27 but then collapsed back down in a fashion rarely seen after such a strong breakout. The FAS caught support at 21 and is now hanging in around that old breakout level of 24 once again. It needs to hang in well on any selling to come near-term. If it can hold well, and then push forward, it will be able to help the S&P 500 shoot and stay over 24.00. If the financials are doing well, you can bet almost 100% that the rest of the market is doing as well, if not better. Something for us to watch for the near-term.

Bank of America Corporation (BAC) had a strong positive divergence at the most recent lows and has made a nice move off that divergence. It's still in play, thus, it gives hope that the banks will hang in there, at least for a while longer but you don't want to get too happy owning too many of these longer-term bear market stocks. Short-term isn't bad there. Watching closely.

The 50-day exponential moving average is climbing on the SPX, up to nearly 1180, which is where the bottom of a gap lives. This is important because it shows overall market strength. When the 50-day exponential moving average is climbing it adds support to the selling on pullbacks that come from overbought conditions on the 60-minute charts, or even the daily charts. It wasn't too long ago it was at 1172, but now at 1180 it's doubly important because of that gap I just spoke of. It adds to the difficulty the bears will have selling this market much below that on any attempted selling in the near-term.

Buyers love 50-day tests, but they also love to buy at strong support created by gaps, and now the 1180 to 1186 gap is joined by the 50-day exponential moving average at 1180. The job gets tougher and tougher for the bears. 1180 is a long way from here, but the market can always go back and test important support, thus, the bulls can feel good about the added support created by the 50's meeting the gap.

I like telling folks about what we can gather from market behavior when it seems strange to them, such as what took place last Friday when the Jobs Report was absolutely horrible. No one will argue that it stunk much worse than anyone had thought possible. Funny to actually watch all these supposed experts on CNBC telling us they expect job creation near 150-200K and then the report comes in at 50K. I mean come on. They also expected the unemployment rate to be between 9.5 and 9.6%. It came in at 9.8%, a big miss there as well.

They all stood there with shock on their faces. The masses expected the market to crater lower. Yours truly included. The market yawned and refused to fall. This tells you as much as you really need to know about the market environment we're in. Bad news and it is still not being sold. In a bad market, good news will get sold. In a good market, bad news will be ignored. That's where we are for the moment folks. It is what it is, even if you think it's inappropriate.

I understand how many would think it makes no sense, but you can't, or should I say you shouldn't, argue with the market. For now the bigger picture message is buy all pullbacks. In the mean time, you should also have some small exposure to the long side. Nothing bigger until we blow through 1228, or hopefully, pull back first to unwind those oscillators.

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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