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Stock Market Grinding Action at Overbought.....

Stock-Markets / Stock Markets 2010 Mar 08, 2010 - 06:35 PM GMT

By: Jack_Steiman

Stock-Markets

Which is exactly what we're doing right here. With S&P 500 resistance at 1151 and with many index charts at 70 RSI's, it's not easy here for major upside until we get some unwinding of those daily charts to where the RSI's are at least in the lower 60's, if not somewhere in the 50's. It's not just that we're overbought, but again, when you add in major resistance 1% away, it makes the journey that much more difficult for sustained upside in the short-term.


This doesn't mean we won't stay overbought a bit longer and trend up to or slightly above 1151 first but don't expect the big blast from this point until we can unwind things to where new bull legs can get going. I do believe that leg is in our future but just not from this point. Lots to look forward to if you're a bull but not yet.

I get asked about shorting a market when you know it's getting to a point where pullback's naturally take place and I say not a chance. You never short a market in a clearly defined up trend because you can stay overbought a lot longer than most think possible, yours truly included. While it's not appropriate to fire out 10 new long plays because of the overbought conditions we're in at the moment, firing out shorts is the last thing I'd do knowing the trend is undeniably higher for at least the short-term, which is all I'm interested in for the moment. If you do decide to short, be very nimble with very tight stops. The worst thing any trader can do overall is to be impatient and play for the sake of playing because you're bored. So maybe it's not time for a loot of new longs so let me short. No way is that the correct thing to be doing. Be patient and let things set up as they will for sure.


1115 is now massive support on any move lower on the S&P 500. Traders know this and on any selling down, new buyers will want to come in and defend this level in a big way. The bulls took a long time to capture this level and barring the unforeseen, they will defend this level as it gets approached. I don't think we'll get all the way down there but it's good to understand where the bulls will come in hard if things start to sell off a bit harder than many think possible. Lots of computer generated orders sitting there and waiting if the market gets that low. When trends are higher, those who have missed the ride get anxious and want to participate and that alone can help keep things above critical support. Also, the bears know what levels the bulls will defend and if the trend is higher and the market has trouble falling, they'll stop shorting and in fact, will cover their shorts giving the market upside fuel.

No matter where you look after today's action, you will see 60-minute charts on both individual stock charts and index charts at extreme levels of overbought, confirming the overbought that exists on the daily charts. There are RSI's well in to the 70's and even the upper 80's. This is simply unsustainable. It doesn't mean slaughter and it may get worked off mostly with a move laterally although a bit lower, of course. Just because we're very overbought on all time frames doesn't mean death. In fact, quite the opposite. Markets don't get this overbought unless it's extremely healthy. Weak markets sell the moment any time frame chart gets to 70 RSI. Healthy markets stay overbought and can get to levels of extremes such as we have now so although this means some boredom likely short-term, it bodes very well for the weeks, if not many months to come. Hang in there as things get worked off in the days ahead, even if we grind to 1151 first, although that's no guarantee. Patience will pay off big time.

Peace

Jack

Jack Steiman is author of SwingTradeOnline.com ( www.swingtradeonline.com ). Former columnist for TheStreet.com, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

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