There comes a time when it’s best for everyone who is bullish to step back and take it easy for a while. It’s never great to have markets only going in one direction, even if the move is on small candlesticks. It’s best to let the momentum that built up too fast take a breather. If you keep moving higher into overbought daily index charts, at some point you get a very nasty and unwelcome snap down. We started to get very close to that becoming a reality as the Nasdaq got to 75 RSI, while the Dow only got to 71 and the S&P 500 to 73. If we had gotten up near 80 across the board, which would have meant being overbought four weeks straight, the market would have come collapsing down.
Not good at all, and not what any bull should want. Yes, it’s more fun if we stay overbought for a long time, but the price we pay really isn’t worth the short-term fun. Today we had some decent selling, especially on the S&P 500 and Dow, and this allowed for the RSI’s to finally come down from the 70-plus zone they’ve been in. The Nasdaq holding up the best, by far, as froth remains mostly in vogue for now. That’s what we want to continue to see taking place in the weeks and months ahead as froth leads a good bull run, not fear stocks. Not high dividend stocks, but froth stocks. Stocks that aren’t worth basically anywhere near what they sell for. That’s when you know a market is truly healthy. So, today began the process of some unwinding, and it would be best if the market remains mostly choppy to a bit more down for a while longer. The more we unwind not only the RSI’s, but also the stochastic’s and MACD’s, the better off we’ll all be in the long run. All of this unwinding, of course, on those daily index charts, not the 60-minute short-term charts. Today was a successful start to what every bull should actually feel good about.
The leaders to the down side today were the leaders to the up side during the recent rally. Financial and commodity stocks pulling back the most, because they basically became the most overbought. That’s a natural process. That, which didn’t do much, isn’t being attacked as hard. The deeper you are into overbought, the harder it is you have to come down so those daily oscillators can reset. Those stocks taking the biggest hits are also the healthiest stocks around bigger picture. Getting very overbought is new territory for many of these stocks. They haven’t been overbought, especially the financials, in an extremely long time. The key is how these sectors unwind their overbought conditions. If it’s back below key support levels, such as critical exponential moving averages, then we have a problem. The S&P 500 should hold horizontal support, and the 50-day exponential moving average at basically 1267. If we start to lose 1267 for some reason, the entire rally up will have to come into question.
I don’t expect that to take place, but you always have to be on guard for that possibility. 1267 is just huge support, thus, the bulls must hold there. There is also strong support at 1297 where we have the 20-day exponential moving average but it would be fine to lose that level. Losing 1267 would not be nearly as acceptable. You should never lose the 50-day exponential moving average if it’s trading decently above the 20-day exponential moving average. Add in the great horizontal support at 1267, and the bulls have no excuse to lose 1267 as we move along and unwind. So far, so good, as the process of unwinding is now under way.
There is a lot of noise coming out of Europe again. The market always finds the necessary trigger to get the selling moving along once it knows it needs to actually sell. It’s so interesting how you don’t hear anything about Europe being in rally mode. It knows not to find anything to upset the ball already in motion, but when that ball needs to stop, news suddenly, magically appears, and, thus, it derails the momentum. Perfect really. We find what we need when we need it, and that’s what the market has done. The market has now conveniently decided to watch Greece again, and whether it’ll get the right package to keep them afloat. The bulls would actually love to hear the negativity move skyward as that really helps the market unwind those nasty overbought oscillators. A little selling always seems to go a long way towards getting folks to feel pessimistic again. Fear is an easy emotion to wrap our heads around, since most of us have dealt with two or three bear markets in the last twelve years. Three if you include 2011. Some do, and some don’t, but either way, it was nasty as it came down hard for a while there. It surely reminded folks of 2000 and 2008. Expect to hear more rumblings about Europe, until the selling is over when that news will suddenly disappear once again.
So, now we take things day to day and watch how those daily index charts unwind themselves. The process is clearly off to a good start, but feels like more is needed before any sustainable move back up can begin. I personally want more selling, or at least sideways action, so we can get things really unwound. The deeper we unwind the healthier it is for equities bigger picture. 1297 is good support. We got close to that today. 1267 needs to hold bigger picture and it should for now. Every day is a new story, especially when Europe is on the docket. There is always the potential for the worst case to occur, and that would, at the very least, put the bullish case on hold for a while. At worst it could end any further upside. We take things one day at a time, but for now, I like how things have begun to unwind down from very overbought. Be patient and accumulate the best stocks on weakness.
Peace,
Jack
