The one thing we haven’t had up to this point is the weekly charts flashing a red flag. The red flag being RSI’s between 70 and 73 and stochastic’s between 97 and 99. These readings on the Dow, Nasdaq and S&P 500. We haven’t had those readings since the summer of 2007. We sold off from there. It’s been nearly three years since these levels of overbought have been seen on the weekly charts, and the fact that the daily charts are also shooting off red flags, tells me we need to be EXTREMELY cautious here. The daily charts are overbought and are displaying negative divergences. Add that to the weekly charts and we have something to be concerned about. It says do not even think about getting overly aggressive here.
Now listen, just because we have these set-ups on the daily and weekly charts doesn’t mean we sell tomorrow. Not at all, although, we could, of course. It means that every point up from here will be tough to say the least. Grind at best. It means the market is ripe for some good selling, but all bull markets need a catalyst to get some selling started and earnings will have to be the way. Bottom line is this, tonight you will be able to view the weekly charts and you will understand the risk involved near-term. Look at how small each stick is getting as we climb in to extreme overbought. Not great.
Last night we saw the futures explode on the Greece bail out. There was no way they were going to be allowed to default. The world rescued yet another undeserving situation but that’s the new world we live in. Bail out anything and everything. No punishment for poor behavior. In fact, keep encouraging it. The futures rocked on the news but that lost its luster as the evening went on and thus we basically opened flat. Naturally, the retail player bought the market up some but there just wasn’t anything behind it. Grind, grind and more grind. The gains slipped away at the end of the day leaving the market nowhere but overbought with some negative divergences on the daily chart.
Earnings season starts tonight. Earnings should be the catalyst to sell but there will likely be some good reports along the way thus lots of whipsaw will probably be the game. However, one bad night could kick start an overall selling episode. I’m not suggesting market death as I remain bullish. However, you have to know when to take the foot off the gas and now is that time. You sort of need to have some exposure due to the nature of this relentless bull market. I don’t want to get hit hard here thus the reason for lighter exposure, but again, some is necessary unless we get the kind of reversal stick that says run, don’t walk away from any longs for a while. We haven’t seen that stick yet. We haven’t seen the big gap down that actually holds and runs lower all day. Until we see that print or until we get a gap up that reverses down hard all day, you have to keep some scratch in the game. No one knows when that’ll hit.
This week we hear from heavyweights thus things should get very interesting. Tonight we have Alcoa (AA), but that’s not where the real action begins. Tomorrow we hear from Intel (INTC) and CSX Corp. (CSX) . Wednesday we get news from JP Morgan Chase (JPM) and then a big double whammy on Thursday when we hear the numbers from Intuitive Surgical, Inc. (ISRG) and Google (GOOG). Friday it gets just as good when we hear from General Electric Co. (GE) and Bank of America (BAC). Lots of stock reports to move this market. Good news should be met tepidly. Bad news should sell things off nicely. The season is upon us once again.
Now folks, keep in mind I’m still very bullish overall, just not so short-term. Not bearish though as I feel the best way to attack a bull market is to buy weakness at appropriate support on the proper internals with tight stops just in case the selling gets more intense than expected. Under no circumstances am I bearish. Just too many historical red flags to be aggressively long here. Plain and simple as that.
Peace,
Jack
