The answer to the question in the title is tough to answer. Normally things are very technical. You can look at the charts on many different time frames and figure out exactly how much the market needs to sell, or rise, depending on the market we’re in. However, there are times when trying to figure things out technically is a bit more difficult simply because we’re dealing with a special situation. We know that situation is Mr. Bernanke and the plan he has implemented just last Thursday. He has instituted QE3 and that changes the landscape quite a bit from what’s considered normal for even the stock market. While things are on the edge of overbought, his actions may not allow things to unwind as much as they normally would if there had not been interference.
In normal times you get to 70 RSI’s on the daily charts and the 60-minute charts, and you spend many days to at times, several weeks unwinding those overbought oscillators. Once that has taken place it is safer to go back in and buy new set-ups. With the money floating out there likes air pockets, who knows how much unwinding we’ll get. Maybe it will be the normal amount meaning daily RSI’s back in to the mid to upper 50’s. However, the market can stay overbought for very long periods of time in special situations. They don’t have to which makes things tough, but they can when things align. You get that down day that starts the unwinding process and you say that makes sense.
There must be more coming since we’re not unwound enough. You get surprised to find things stop selling off with any force. No follow-through. You may not blast back up, but you then go horizontal instead of lower, and you get fooled in how to proceed, because you feel you can’t trust to buy at still somewhat elevated levels of overbought. We are in somewhat unchartered waters. We got overbought just before his announcement which made things even more overbought. It would have been nice to have the news hit when we were neutral or more towards oversold. So with today’s action we got some very needed unwinding but it’s unclear just how much there is left, again even if it means we just trade more laterally than down with any real force. Some exposure makes sense if you already have it but adding too much makes little sense until we gain more insight as to the markets overbought intentions.
In markets such as these, you also have to try to transform your thinking from what you would normally be dealing with to how the bears are thinking about things. You wonder just how aggressive they want to be in an environment that’s so market friendly thanks to the Fed. Many will surely try to short and many will also sell and take some gains but will either of those two sides be aggressive? Hard to imagine they will be, although you never know for sure. If I’m a bear, I have to be honest that I wouldn’t really be thinking much about the short side of the trade right now, because I recognize I have a desperate Fed who seems possessed with keeping the economy afloat, and the best way to do that is through the stock market. It may not seem fair and to be honest, it’s not.
That said, it’s what’s going on, so my thinking is the selling won’t get too deep, and the best the oscillators are likely to do is to get back to the neutral area. Anything approaching that would be my signal to get back into new exposure. Markets are rarely dull if you apply the thought processes likely going on in the minds of the opposite trend in place. For now, I have to think the bears are not going to be getting too aggressive on any selling and would likely be happy to exit shorts they’re currently in if they get the chance by seeing somewhat lower stock prices.
The market will always look for excuses to sell when it needs to. Even if that selling isn’t go to be long lasting it will find a way to get whatever news it needs to unwind. Some poor economic news hit from China last night. It didn’t exactly set our futures on fire to the down side but did offer up the bears an excuse to be a bit aggressive as the day went along when the bulls had nothing in them top take things higher. I always feel the market knows its destination once the selling begins so there’s really nothing that’s going to get in its way, even if good new hits out of the blue.
If the market wants to sell further it will find a way to get more bad news built in. What didn’t seem to bother it just days ago will suddenly bother it today. Just remember that this is normal and not to make more of it that it really is. Again, it’s the excuse to do what it wants to do to unwind. That in mind, the S&P 500 has strong support at 1440 down to 1420, and I don’t see the market selling any lower than that area of support. However, you want to see a stick that says it’s safer to jump back in. I’ll keep a close eye on things as they do indeed try to unwind further. A little deeper selling would be best.
Be patient.
Peace,
Jack
