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Stock Market Quiet Day At Overbought...

Stock-Markets / Stock Markets 2010 Jul 28, 2010 - 02:43 AM GMT

By: Jack_Steiman

Stock-Markets

When a market gets overbought on the short-term charts or those 60-minute charts, it's important to allow them to unwind out of overbought. The key to that unwinding is how much price erosion takes place. If it's more intense or impulsive in either price, or the oscillators, that would be a small red flag to keep an eye on. However, if the move down is basically done with little price erosion and just your normal oscillator unwinding, then that's far more positive and clearly what we had take place today. Sideways or down side action would be best in unwinding things further, but there's no guarantee we'd get too much more since the bulls are trying very hard to keep this market as far away from retesting 1099 as possible.


It wouldn't be bad if we did retest, as long as we shoot up, once again, away from this level of support, but the bulls don't want to play with fire. I think they'll try very hard to hold the line above 1099, and turn things back up and keep the 60-minutes charts overbought a bit longer next time around. The best part of today's action was the volume and how that contracted across the board. That's always key as well when things turn back down to pullback from overbought. Volume was really quite light today, so there were no signs of any distribution, which we would see if volume dramatically picked up on the selling. Clearly not the case today at all. From a technical perspective, so far so good as we try to unwind from overbought on the short-term charts.

We started out with a gap up today, but that wasn't very good for the market as it created even deeper overbought short-term charts. A move down would have been best, but we had some strong earnings reports from EI DuPont de Nemours & Co. (DD) and Cummins Inc. (CMI) pre-market, along with others who said things are improving, thus the market was forced higher at the open, but that was pretty much it for the day. The market then slowly eroded back down with small impulse moves back up that didn't hold, especially as the day wore on. Finally the bulls gave way at overbought and down we went. Nothing bad at all with the Nasdaq leading lower, but hardly too much selling to get disturbed about. Pretty flat on the Dow and S&P 500. We closed off the lows, but again, you'd have to say today was pretty successful for the bulls as they did unwind somewhat, but with no big price declines. A positive day, no doubt, for the bulls.

Tomorrow we get the weekly update on the bull-bear spread. It's interesting to get this update each week to see how the masses are feeling. If they remain mostly bearish, then that's good news for the bulls, and tells me we can go higher than most would think possible as the weeks go on. We were at 2% more bears two weeks ago, and only went to par last week, however, the trend is clearly too many bears in the market for the time being.

With some bullish action overall last week, it'll be interesting to see how many new believers we have, or don't have, about upside action being sustainable. I keep a very close eye on the sentiment issues to get a feel about whether things can extend on either side of the market. For now the news is very good for the bulls. Tomorrow my feel is we'll have a few more bulls than bears from a percentage perspective, but I don't think it'll be very much at all, which still keeps this market on the side of the bulls.

The earnings season has, overall, been very favorable with some disappointments, of course, thrown in to the fray. There's always a few who don't do very well, but things are about as good as can be from the perspective of the bulls. Things started out quite badly early on with FedEx Corporation (FDX), Nike Inc. (NKE), and many other important stocks saying bad things about the future.

This has miraculously turned around. I can't find any other word for it. Even FedEx, which warned three weeks ago on their report, just upped their yearly guidance. Just three weeks later you go from warning to upped guidance? Curious, but hey, the market likes it. You have to play what the market tells you to, like it or not. Bottom line is earnings have been a very strange, but pleasant, surprise to all of us. So we now have sentiment and earnings on the side of the bulls. It is what it is for the short-term anyway.

Support is 1099 down to 1090, and resistance is big at 1131, the last important high from where we fell. Any action between these critical price points is just noise. Pullback's can be bought, but you don't want to buy too much right in front of 1131 unless we can break out above it with force.

We'll just play whatever sets up in the days ahead.

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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