The market has been slowly, very slowly, but very steadily, moving higher over the past few months. Ups and downs, but the overall trend has been higher. The daily index charts have been following along, with a slow move on the RSI’s towards 70, the magic level that tells us that sooner than later we’ll need some type of pullback to reset those oscillators that tell us what we can expect from the market over time. They are bullish, but they are now right at overbought, and may get a drop more overbought in the days ahead before we top out short-term. 70 RSI’s are NOT a sell signal, although many treat it as such.
They are hesitation points that suggest a healthy market needs a little pause to unwind. If you have other negatives, such as distribution at tops, or strong negative divergences on the daily and weekly charts, then you can short, because those would be sell signals, not just pullback signals. There are major differences between the two. In a healthy environment you get to 70 RSI, or a bit above on the daily charts, and then either time or price move things down to reset things. That’s normally where a very strong buying opportunity presents itself. One that shouldn’t be missed. Hopefully, that will set up once we get the necessary unwinding. Markets can be funny and stay overbought for a lot longer than most think. Maybe that’s what we’re about to experience, and if we are, so be it. However, you can’t plan for that to take place. History tells us that sooner than later the pullback from overbought 70 RSI’s will ensue. We’ll have to abide by that probability for now, and not get aggressive for a while, until things actually do pull back. Bigger picture action still seems quite positive.
The earnings season is getting under way, with a little more thrust now as we’re hearing more and more from leadership stocks. The results thus far are definitely favorable. Google Inc. (GOOG) has been a disappointment, and there have been a few others. There will be others, still, but the overall majority seem to be saying the right thing as far as the market is concerned. That’s crucial if a bull market from here is to evolve. It’s always about earnings, and that will never change. If the economy seems to be improving then the market is going to have a very hard time gaining momentum to the down side. A solid forecast on future earnings is going to keep the bears pinned down. They won’t get aggressive and will be forced to cover, if they don’t get what they want as report after report comes out from the major leaders. Things will have to start turning south in a hurry for the bears, if they’re going to get satisfaction. For the moment, what we’ve heard so far is far from bad news for the stock market with regards to the earnings reports.
The VIX is very low. Playing around with 18-20 means the moves in the market are slower and slower with most traders not really having a good time with things. They prefer a market that rocks a bit. Maybe they don’t need a VIX over 35, but they sure would prefer a VIX over 25 to allow some larger intrapersonal-day swings. It gets boring for them, but the truth is that low VIX readings usually, if not always, equate with a strong and healthy bull market in the making. A little selling off the overbought conditions would give the VIX at least a little boost higher, thus, bringing about bigger swings day to day. That said, it’s good to see a lower VIX as it suggests things are calming down, with regards to the worries that have been hanging over this market for far too long.
The market may make it up to 1320-1340 on this move, but should start to struggle mightily from here, with regards to sustainable upside, until we get some decent unwinding on those daily index charts. Some weekly unwinding wouldn’t be a bad thing either. S&P 500 1292 down to 1267 is strong support. I would like to see 1267 hold on all selling attempts that are to come once we reverse from overbought. Now is not the time for aggression, but it’s best to see the reversal stick more bearish short-term before jumping completely out of your longs while we wait for a better opportunity. Hopefully, things will set up as I see them doing so once the selling kicks in. One day at a time as always.
Peace,
Jack
