Most folks were looking for the market to gap up one last time, and then reverse down. The only problem is the gap was a big gap down, with a strong reversal back up, fooling the masses yet again. What else is new! This market is once again doing something unexpected. Once the market gapped down, you can bet, most thought it would be a gap, and then a run lower. But it didn’t happen that way today. It did gap and run lower for about five to ten minutes, but that was all it would do. At that point it was a gradual move back higher that saw the entire gap down get taken out, which is something that only happens in bulls when the gap was as big as today’s gap. We don’t have to necessarily understand it all. You have to admit that once the market finally had a huge gap down, it wasn’t coming back any time soon. After all the repeated times at overbought on the daily index charts, you’d think that naturally, once we gapped down, the pullback would stay for a while. It sure felt that way today, but once again, there were willing buyers on the selling as those who have missed the run want to get in. Apparently, they are not waiting long to do so.

In the end, today was another day of frustration in many ways to both sides as the bulls certainly wouldn’t mind some better entry points, while the bears would do just about anything to stop the losses they have incurred for quite some time now. The market really is not being very friendly to either side now as we stay mostly overbought.

So what does an overbought market mean to both sides besides not allowing many new entries for the bulls and the usual pain for the bears?

It means we have lost all volatility. This makes for an extremely boring time for all traders. The sticks get smaller and smaller all the time as the VIX is trading at obscenely low levels. Oh, for the days of 100-point gaps in both directions, and then nearly 1,000 points up and down in the Dow daily. Those were actually not such fun times, either, as the volatility in the 30’s and 40’s on the VIX made trading too scary for the majority of people, and rightly so. Something in the middle, like a VIX in the low- to mid-20’s, would be wonderful, but for now, the market isn’t offering up any such gifts. It would be too good for everyone, and we can’t have that, can we! So for now, we have to accept that bull markets, when overbought, can be extremely boring, and this is one of those times. So buckle up, and accept what we’ve been dealt and ever forward.

The market continues its way towards keeping things alive through sector rotation. The transports were recently hit very hard, but did well today, although, one can only wonder how, with oil well over 100$ per barrel. Bull markets don’t care about such things. They should, but often do not. The market needs a ride into the sunset, with all sectors joining in to allow it to fall. But when this type of rotation is ongoing, you often just remove overbought through time, and a little downward price, instead of one huge melt down. That could change at any time, since we’ve been so overbought overall for so long, but that doesn’t have to be the way. Maybe the VIX only gets back to the upper teens to low-20’s for a while, and then moves lower, once again, to the mid-teen area where we will deal with little market movement again. If nothing else, a pullback of some kind would at least allow for some action down the road, but we’ll have to see what the market offers up.

Strong support remains at the 20-day exponential moving average at 1344, with the 50-day exponential moving average, and the long-term down-trend line now at 1311. The bears have yet to fully challenge those 20’s at 1344. They started to inch their way towards it today, but they simply couldn’t sustain the down-side action. This important level has not yet been tested. It would be best if it was as it would mean we have some unwinding, but for now, the bulls are holding things above 1350. 1370 was tested today yet again. The bulls keep knocking on that door, but they have yet to clear it forcefully, which would then allow for a potential move to 1400. The new trading range is basically 1350 to 1370. Again, not a whole lot of volatility is there! One day at a time. The market has more risk associated with it now, so please, be aware of that.

Peace,

Jack