The market reached levels of oversold (30 RSI and a 2% bull-bear spread) that has led to a short-term rally. The rally has been good in terms of price but not so good in terms of volume and having the Nasdaq lag well behind the Dow and S&P 500. The Nasdaq should lead not lag, but nonetheless, we are trending up short-term based on those sentiment issues. You could see today’s action as classic to this situation. RSI at or above 70 on the 60-minute charts all day long. Every single, tiny pull back was immediately gobbled up by the bulls. No selling permitted at overbought. This is what takes place when you simply have had too much pessimism creep in to the market place.
This will and has allowed the oscillators to begin to unwind on the daily charts to a neutral position while allowing the 60-minute charts to actually become quite overbought. It should be no shock that we’re staying overbought longer than we basically ever do at oversold because that’s the nature of all markets. We almost always stay overbought longer. However, RSI ‘s in the 70’s is ultimately unsustainable thus some small pullback will have to occur very soon to unwind. This will allow the market to make one more move higher to the 1090 area where we have both the 50-day exponential moving average and a critical down trend line in place. This should have allowed enough daily chart unwinding for the next attempt at lower prices by the bears. How low we get is unclear at this time, but will need to be watched closely in terms of how the oscillators move and how much volume comes in on the selling once we get near S&P 500 1090. For now, we have a market that needs a bit of selling before another push upward that tops out this move off the bottom.
Yesterday was important for the short-term in that the market gapped up and lost the gap after the huge day on Wednesday. However, although the market lost the gap, it did hold clear candles by closing at least at the opening gap, if not a bit higher, on most of the indexes. If it had printed black candles, meaning on balance sellers after the gap up, it would have had more bearish implications short-term. The market held where it had to for the bulls yesterday and followed through yet again today. No sellers in the gap that allowed the bulls to push it through the gap late in the day. Bullish short-term action for sure. Surprising and bullish. The bears are allowing things to get away from them here. In the end, yesterday was a good day for the bulls in the way it held clear candles and we saw the follow through again today.
S&P 500 1090 to 1094 is the defining line here. Can the bulls just blast back through a major down trend line and the 50-day exponential moving average? We’re going to find out shortly but not before we get some selling. The RSI on the 60-minute charts are nearing 74 across the board. That is unsustainable since stochastic’s are also in the upper 90’s. The entire tone of the market would change with a thrust through the 1094 area on the S&P 500. Maybe there’s no reason for the market to burst higher from a fundamental perspective, but the market is often not about that. Sentiment did get pretty extreme with RSI’s also tagging 30 on the daily charts across the board thus sentiment alone can burst a market higher. We saw 37.3% too many bulls take this market down 210 S&P 500 points. How far can 2.2% and RSI can us up? We’re on our way to finding out.
Look folks, markets can turn on a dime, and now with sentiment on the side of the bulls, the next part of equation is earnings. That begins pre-market on Monday with the report from Alcoa, Inc. (AA). If somehow the earnings reports can come in bullish then we will likely see this market blast off. If they continue to disappoint as the early group has, then we stay in a range for some time until sentiment can be worked off. Be a market agnostic and you have the opportunity to do better at this game. We are certainly unclear here. Some of the bearish case is gone due to sentiment.
Things are wide open here for both sides.
Peace
Jack
