This is clearly the case, as so many folks marched on to those business stations predicted, that once the volume came back somewhat on the first day of the new year, things would fall hard based on overbought daily index charts along with sentiment issues. Not the way the bears thought things would start. Too many people were getting in on the trade that things would fall apart. Once that happens it’s lights out on that trade.

So, today we saw the market gap up hard after Asia rocked up and Europe followed along right behind. Why should we be left out! Our futures rocked up and the gap was in. A pretty powerful one at that. The real question from the gap up was whether the overbought conditions created by the gap would cause the market to roll over. You could tell after 30 minutes that this wasn’t going to be the case at all. The market, although it wouldn’t power higher, would at least hold the majority of the gap up, and that’s exactly what took place.

We advised against many, if any, new plays once we had the gap due to very overbought conditions, but at least the market held their gains overall, although, we’re still overbought at the close today. The S&P 500 especially so. A solid showing for the bulls today. Until we see the proper reversal down on the right volume, the trend in place should be followed and nothing else.

The good news was that across the board today, although Silver is flashing a negative divergence, and thus, you should be careful there short-term. Most sectors are not, and there was quite a pullback late in the commodities world. That, too, should be a small red flag short-term as these stocks have the most poor divergences along with the most severely overbought conditions. Froth can remain a long time, so they may try to grind higher. Just beware of the higher risk in those trades short-tem.

Financials are rocking along and that’s a real good sign. They are refusing to lose their bullish patterns taking place, which is a real change of character for these stocks. The longer that goes on, the better the odds are that things stay more bullish for these stocks, whether it’s warranted or not. That’s for another time. Bottom line is that these stocks are showing a real change in their behavior for the first time, really in years, so let’s see if this becomes normal instead of a once-in-a-while situation.

Most sector charts took another first step up in an apparent new leg higher today. They were sitting around doing nothing for quite some time. Just meandering along. But today was more powerful, and the candle sticks printed flashed a new start up, but also remember they did so in to overbought. You have to respect the fact that they did this, and thus, it is possible a leg higher is upon us, though, I would expect some chop based on those current oscillators.

Normally when we get these types of oscillators we see a very intense selling episode and not a new leg up, and thus, we have to be on guard for some type of short-term head fake up before a harder sell down. But the impetus is on the bears to make this happen, and until they do, we stick with what we see, and that is overall upside action. I never love seeing new leg ups begin at overbought, but we’ve seen it enough times to know they do happen. This game always keeps you on your toes, and once you let your guard down, you pay the price. So, I’ll stick with being cautiously optimistic for now.

At some point some heavier selling will kick in folks. RSI’s are all above 70. Maybe after one down day we start back up again, but it really isn’t time to get overly aggressive, even if we are destined for higher prices down the road. Too high on those oscillators for too long simply means we will pull back harder than one might expect. That’s the way the game works. Timing is truly impossible in frothy times such as we have now, but play the trend as it is. Don’t guess. Don’t be shocked when we get hit hard. I do think it offers a buying opportunity over time. In this insane game you move along slowly, especially at overbought frothy times such as we’re in now.

Peace,

Jack