I can only imagine the frustration being felt by the bears who simply can not catch a break at this moment in time. Believe me, their time will come in Q1 for a nasty selling episode. For now, though, all they know is that the market simply won’t fall, no matter what the readings say, and no matter how overbought the daily index charts happen to get. 70 RSI is bringing no satisfaction, and on top of that, the moment we go a drop below 70 RSI the buyers come blasting right back in. They are learning the hard lesson of not front running a move. You have to learn to wait for it to take place before you can actually play it safely. Trying to get cute, and play it before it snaps, just brings about serious frustration.
The market was ripe, they thought, for a big gap down today after yesterday’s move. Didn’t happen as poor futures pre-market improved some once the ADP Jobs Report came out much better than expected. Mortgage starts were also much better than expected, so a near 100-point drop in the Dow futures were only about 25 points once we opened for trading, and from there it didn’t take very long before things turned to the green side of the equation. The rest of the day was spent moving higher, although slowly, and yes, making overbought more so, especially on those small cap and S&P 500 index charts. Brutally overbought now, but still no signal in place. Bottom line is yet another up day, but the red flag is up for the bulls, while the bears suffer silently.
So, let’s go back and look at the weekly SPX charts and what the signal is there. It’s very healthy, for sure, but there’s a big problem developing there as well for the bulls. The RSI is slightly over 70 at 71.27. Over the past 15 months we’ve had six journeys to the 70 RSI level. At one point it got near 74, thus, that’s still possible. The minimum pullback from the 70 RSI area was points with one of them being 200 points. Yes, I said 200 S&P 500 points. 1225 to 1025.
There is no formula to knowing how many points we’ll lose once the pullback candles flashes itself, but I can tell you it won’t feel good if you’re overly loaded up in longs. There’s no reason not to have some small exposure long here, but be prepared for what’s coming some time soon. Make sure you don’t involve yourself with too many plays and get caught. Greed will nail you if you get too emotional with this market. 71 RSI on the weekly chart with 76 RSI on the daily chart is a recipe for a strong pullback in the near future, so be ready for it when it hits.
The great news for the future is that the news is getting better from an economic perspective. At least that’s what the Government is telling us. We saw an improvement in new mortgage applications of 2.3% from last month. That was much better than expected. We also saw the ADP Jobs Report tell us that jobs increased at a much better pace than they expected by almost 100%. Manufacturing was also much better than expected. So while the market will take a hard hit lower soon it should set up some awesome plays for the future.
Weakness will be able to be bought. The news is so good on the economic front these days that it’s preventing the market from falling in the immediate moment. Nasty futures recovered today on the good news. If the good news continues while the market is pulling back it should set up a fantastic opportunity to buy once again. So, although the immediate future isn’t great for the market, the mid-term and longer-term still looks quite good.
The buying we are seeing is basically across the board, and that’s very good news for this market. The financials are involved and that was an element that was missing for the longest time and was preventing the SPX from racing higher. It lagged badly behind the small caps and the Nasdaq. As long as the financials keep getting bailed out by QE2 and other fed Bernanke tricks they should perform well overall. This bodes very well for the market once we get through the upcoming pullback.
The volume trends there are really improving as well. Gold and Silver look vulnerable short-term, but the commodity world overall continues to do quite well. The market is performing the way a real bull market should with widespread buying just about everywhere you turn. If the buying was narrower, meaning fewer and fewer stocks participating on a daily basis, this would be a true red flag. But that’s just not the case at all. For now the bigger picture bull market remains in place.
Peace,
Jack
(American International Group, Inc. (AIG) was up 4.17 today, while Goldman Sachs (GS) was up 92 cents, and Wells Fargo & Company (WFC) was up 72 cents, and although Bank of America Corporation (BAC), Morgan Stanley (MS), Citigroup, Inc. (C) and several others in the financial sector have shown small gains today, they are showing gains for the start of 2011.)
