When markets get overbought they will ultimately need to pull back. The pullback can feel very bad since they can be intense due to the very overbought nature of all the key oscillators from RSI's to stochastic's to MACD's. When markets are strong and they get overbought, since the market behaved so well, most aren't prepared for the type of selling a simple overbought pullback can bring. Today surely didn't feel good. Nasty!

Strong selling from the opening bell through the rest of the day. A rumor of a buyout of Norfolk Southern Corporation (NSC) by Canadian Pacific Railway Limited (CP) got the rails rocking and bought up the iShares Transportation Average ETF (IYT) naturally after we sold. That was it for the good news today. The market was feeling the heat all day long. There wasn't much in terms of the usual rotation. You won't get much rotation once the market has decided it needs to sell from overbought conditions. No one wants to step in and be overly brave knowing the unwinding process has begun. You need to go from being a bit aggressive to being totally patient, which doesn't come easily for most traders.

While the masses show patience, the bears know they can seize the moment, and indeed do just that, which again, makes the selling seem worse than it really is from a technical, longer-term perspective. Today's selling shouldn't be enough to get things unwound. Many oscillators are just crossing down, but you never know for sure. When looking to buy you want deeper unwinding, but more importantly, you want to see bottoming candles on the daily-index charts down the road to tell you things are safer from a risk/reward perspective. While the market doesn't always flash a classic bottoming candle it's still safer when overbought to wait for a candle stick that says there's at least some evidence the buyers are catching back up to the sellers. Today was simply a classic pullback from extremely overbought oscillators across the board. Nothing bad about this type of good selling. Good because it lets the market breathe a bit. Overbought that stays overbought becomes more and more unhealthy. A good start today. Hopefully, some further selling to unwind more deeply is ahead of us.

The key to all selling in a bull market is to understand what type of selling we're getting to the best of our abilities. Nothing is etched in stone, meaning you don't always have to have something occur to make it official. If we had big volume or distribution volume then that would tell is a bigger, more important message about the market. It would mean the bear is rearing its ugly head. That said, you don't have to have distribution to begin a bear market, but it's very rare not to have that process take place in some shape or form. Normally you begin to distribute out when the big money has said enough is enough about the bull. They gradually sell their positions, but they do it slowly so as to not shock the markets, which over time allow them to sell at higher prices.

If they kill it too quickly they'll scare away the weak hands and they won't buy the market back up. If they do it gradually the weak hands will buy the market back up, and then the big money will, once again, distribute a little more, and so on, and so on, until they've sold all the need to. At that point, they're ready to short and send those they gave their shares to, to a not so good place for a long time to come. That's the normal process of how a bull transitions to a bear, thus, this is what I'm watching for. Today we saw nothing of the kind. No distribution off this top which tells me there's a good chance that over time we will see the market surge back up again. No guarantee of course but that's what I took out of today's action. Only time will tell if I am right. Whether we ever get back up again before this bear takes over.

There are NEVER any guarantees in this crazy game, but those long-term, monthly-index charts are about as bearish looking as I have ever seen in my career. Maybe this is the one time that they don't play out as I suspect they will, or even have to, but when I study them they are totally bearish and quite nasty. Again, I would be hard pressed to ever find monthly-index charts that looked this bearish, and, thus, it tells me to be on guard for an eventual top in the not too distant future. Hopefully, from new markets highs so as to be able to escape near the highs. That's a hope, but no guarantee, but, again, since today saw no distribution I could see us making that one more last new high over time. At least that's my hope.

Nothing is easy from here, and won't be for a very, very long time, but we take things one day at a time. 2052 is strong support down to 2034, and then the breakout at 2020. If we lost 2052 that would be annoying, but acceptable. Losing 2020 would not be acceptable, and tells me the bear is already upon us with regards to price. A day at a time, with my best guess being we hold 2020 on this selling episode. Go slow and easy here.

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 constituting investment advice. Trades mentioned on the site are hypothetical, not actual, positions.

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