It’s been quite the run thus far for this market. The S&P 500 made a low at 1045 and began to crawl its way back to the old high at 1151. Step by step and index by index. All of the major indexes clearing their recent highs, but the S&P 500 not quite making the move. The laggard. The market is waiting for the S&P 500 to make that move through to confirm a total market breakout: the Nasdaq, NDX, small caps, mid caps, transports, and so on, already on their breakout. Only the S&P 500 lags behind, but oh so close to making the bulls feel that they’re totally in control of the action.

Not until the S&P 500 convincingly clears 1151 can they truly say that, but no one would argue with the reality that this is a bull market, bull phase, whatever you want to call it. It’s bullish and that’s the trend we’ve been in and are still in. To play against the trend in play usually leads to bad outcomes, and thus it would be best to not let your emotions interfere with what’s taking place. It’s easy to do that based on what’s taking place to so many in a negative way, but it’s all of our jobs to adapt to what is and not what we think should be.

Nothing wrong with Friday’s action as extreme levels of overbought have this market moving laterally when everyone wants it to move vertically. After a strong run that tested the Dec-Jan highs, many of our sector charts, like the Internet HLDRs (HHH), took a breather Friday. You can’t say it was a bearish session because we didn’t explode through the top and put 1151 S&P 500 in the rear-view mirror. If the market can move like this while unwinding, at the very least, the 60-minute time frame charts, it has the chance to make a more powerful move through 1151 very soon, one that would stick and put the bears on their heels. The bulls should be more interested in a move that can stick rather than a move that feels good short-term but causes turmoil longer-term. Some unwinding at the very least would give the bulls a better chance at driving through S&P 500 1151 with force.

Let’s touch on sentiment. I consider this one of the major forces of understanding when a trend in place is going to turn. This week’s numbers show a differential of 21.3% more bulls than bears, and I have received quite a few notes telling me that this means the masses are too bullish. Let me go over this again. When a trend in place is confirmed, basically as we have now, it takes a bull-bear spread of over 35% to turn markets. Not only that, it can often take well over 40%. Our last top occurred with a 37.5% spread. Once you get over 35% you want to start reigning in your bullish stance such as we have now. Not before unless critical support is broken in price to the down side, which in this case would be the 50-day exponential moving averages fairly far below current price.

Any selling that takes place above those 50-day exponential moving averages is just noise within the up trend and does NOT tell us that we’re too bullish with regards to sentiment. Bears may tell you that is the case but it is NOT the case at all. It’s important not to get too emotional with normal selling that takes place from overbought within an uptrend and not to rush to a conclusion that it’s based on extremes of bullish sentiment when that spread is only 21.3%. For now there is no problem with the level of bulls to bears at all. There’s quite a ways to go before that becomes a real problem again.

Let’s go over our focus of picking stocks and what we try to use in terms of picking stocks. There are different things to observe and use at different moments of a market’s evolution. If we see a market bottoming for whatever reason, we like to find stocks at the bottom of their bases or wedges with positive divergences on the daily charts on the MACD, and if at all possible, stochastics as well. Those are the best plays because the risk reward is clearly defined. If we buy at the bottom of the base, the stock shouldn’t fall below the base. If it does, you would get out quickly and keep losses tiny in nature. As markets mature, we look for stocks that may be breaking out and then pulling back to test that breakout. If the volume pulls in on the retest and the trend line holds, then that too is a buy signal. We try to keep things lighter when RSI’s on the daily charts get to or above 70.

It doesn’t mean things can’t run higher once they get to 70, but the odds start to diminish rapidly. Stocks can run to 80 RSI, but you don’t want to own stocks too far above 70 RSI unless you’re willing to deal with a pullback based on the excellent technical shape of the chart. Most of the time 70 RSI’s come off, but not always. You don’t want to take on new positions when RSI’s are at 70 and stochastics confirm with a reading of 90 or higher. We also do not play against the trend in place. We will not short when the trend is confirmed higher, even at extreme levels of overbought, because in a bull run pullbacks are shallow and you don’t know when an overbought pullback will kick in.

With many stocks now sitting in handles, this bodes well for future moves higher and not far along from now. Many MACD’s are bullish in that the slow line is running up to meet the fast line. The slow line is usually red or orange on the chart with the fast line black. Black is positive and red/orange negative. When the fast line (black) holds on sideways to down price and the slow line runs up to meet it, that’s when stocks run higher yet again. We’ve had quite a few of those plays out in the recent weeks. When stocks set up like this, massive support below is in no immediate danger of getting taken out. For now the patterns that are setting up, or are set up, are promising for higher prices in the near future for this market. Doesn’t mean we don’t get an overbought pullback first. It does mean the trend should remain in place.

Looking at longer-term support with some short-term support as well, we can see the S&P 500 has support at roughly 1130 gap. Below that we see important support at the 20- and 50-day exponential moving averages currently at 1122/1111, respectively. It changes daily but by very little. On the Nasdaq, we have gap support at 2300 with the 20- and 50-day exponential moving averages at 2289/2249, respectively. Any pullback that holds above these critical levels is just noise as I’ve said. Please remember that and don’t get emotional should we get some selling first before the S&P 500 cleanly breaks above 1151. Again, the market is healthy but overbought. Some exposure is necessary in a bull trend, which means you can be under water at any time for a short period of time on new plays, but in time they should be more than fine.