On Thursday we came close to a tag of that magical S&P 500 level of resistance, but Friday we hit 876 before pulling back into the close. That neckline is one tough level on its own merits, but when you add in very overbought conditions on all time frame charts you are making the task of taking it out to the up side that much more difficult. It would be healthier for this market to have a nice move lower here for some days to totally unwind all those time frame charts. The longer you grind higher with these conditions in place the deeper the price is to pay once it starts to fall. As it is the market is set up to fall decently enough. The daily charts have been at overbought on the stochastic's for five straight weeks and the levels on the NDX/Nasdaq are approaching the maximum 100 level. You never take on new longs unless you see something very special under these types of conditions. The odds are strong that we're going lower overall over the next several days. If we pull back with light volume, no distribution and a fairly alright advance decline line, it'll be time to load up on some longs at strong levels of support to be discussed later.
There is a great debate going on out there every single day as this rally has taken many by surprise. I have talked about how this rally would be considered rather weak if this is all there was. The bear market move down from 1576 to 666 was so intense that a normal counter trend rally should take this market back up towards 1100. A simple 50% retrace from incredibly oversold conditions not to mention historical levels of pessimism. This rally should have caught no one by surprise as we saw major positive divergences form on the daily's and especially those weekly charts across the board not to mention levels of oversold on the monthly's not seen before. Many are arguing a new bull market has been born. They get caught up in the emotion of the counter trend move and think all is now well with the world from an economic and credit perspective. Again, I think not. Some are arguing that new lows need to be made or at least equal lows. That a retest is important for the health of this market. I don't know that this is true either. The truth about this market may lie somewhere between both scenarios. A secular bear could keep the market towards the low end of the range for years to come, especially if the VIX continues to fall and we lose a lot of the volatility previously in this market. Time will tell the truth of course but let me just say that i would not be buying anything longer term at this point in time. For now the rally should move to new highs but first we should pull back to reset some very overbought oscillators on both the short term and medium term charts. That would allow for a larger move higher in time. If we keep going now through 875 and go to 940 SPX the pullback from that level would be very intense. A pullback here would not feel so bad.
The SPX has great support at 845/850 or the rising trend line from this wedge not to mention 830 on gap. Lots of good support below.If we take out 875 with force, come back and retest successfully, then we will see 940 on the SPX. Chasing new longs now right in front of 875 makes no sense, though we are holding one model portfolio position, Cameron International (CAM). If the market wants to stay grossly overbought at least see the move above and some form of a retest before entering. If you do enter, you'll have to hold your breath as the market grinds towards 940. It would scare me personally to be in much of anything even if we go through 875 here although I would understand the need to participate on some level. When the selling would hit, fast and furious would be the way. You won't want to get trapped in too many plays when it hits because you won't be able to get out fast enough so please watch that 875 level closely here and hope for some selling before it gets taken out. The Nasdaq really has no major resistance until 1725. Best for it pause here as well as stochastic's are approaching 100. Just too overbought for sustainability. 1616 is strong support. 1576 below that.
There are many sectors breaking out across the board. Many are doing so with negative divergences on this last move and yet another reason for this market to pull back sooner than later. Good to see breakouts in sectors that have lagged for well over a year, but that's also normal in a counter trend move off the bottom. Do not get your hopes up too high that this means the worst is over or at least that this market will still struggle mightily once this rally completes itself. These sectors can reverse and lose those breakouts in a heartbeat. Best to play this market with great respect and care. Go very lightly up here at 875 SPX. If the selling is appropriate then we will participate more aggressively when the next buy signal hits. One day at a time.
