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Stock Market Minor Pullback On The SPX/NDX Off 70 RSI's On Daily Charts...

Stock-Markets / Stock Markets 2011 Feb 10, 2011 - 03:16 AM GMT

By: Jack_Steiman

Stock-Markets

You wouldn't call this a strong, or a major, pullback, I'm sure, but it was a pullback to some degree, nevertheless, especially on the Nasdaq and today's lows. RSI readings on the S&P 500, Dow, and Wilshire all hit 70 Tuesday, and thus, it should come as no shock that the market made an attempt to sell off some today. In the end, however, it didn't do a whole lot of selling successfully as the buy-the-dip bull crowd came in again today when things started to really move down. The interesting thing about 70 RSI readings in this bull market is that it has rarely stopped individual stocks from moving higher if they're in the right type of bullish pattern. The RSI readings often get well in to the 70's if not the lower 80's. This is not normal behavior, and shouldn't be looked upon as such, since normally, 70 will stop stocks dead in their tracks.


However, this bull is quite strong even though it's very much in need of selling, and that's why, even though we hit 70 RSI's on those daily index charts, the selling wasn't very intense at all today. The once 70 RSI readings are now down in to the lower and middle 60s, which isn't great, but once we are below 70, who is to argue that we may just blast right back up. It would be best if that did not happen as a more prolonged rest would be some good medicine, but you don't bet against the trend in place once you get even a drop below overbought conditions. Solid action for the market, and for the bulls today, due to the fact that you normally see more intense selling when the RSI's get this overbought.

When I looked around it was clear as can be as to who took the biggest hit today. The commodity world really took it on the chin. Many big leaders, such as Walter Energy Inc. (WLT), broke down badly below their 50-day exponential moving averages on very strong volume. Not exactly what you want to see if you're going to remain in a bullish pattern. Maybe this action is a future sign of things to come for the whole stock market. The commodity world has been the biggest beneficiary of this bull run, and maybe, just maybe, it's time for everything to start to go down.

When the leader up starts to sell hard it is a red flag, although it could just be that they got too extended and needed to come in a bit. The problem is the breaking of those 50-day exponential moving averages. That isn't something that has happened since about ten months ago when they began their journey down. It's too soon to say they're broken, for something lost today can be gained right back tomorrow. It's just interesting to watch these break some in a way they haven't for nearly a year.

I have been getting a lot of questions about the strength of this market and why I think it's holding up. From a fundamental perspective we've gone over it too many times. It's all about printing press Ben. However, from a technical perspective it's more interesting. If you study the Standard & Poor's Depositary Receipts (SPY), Diamond Offshore Drilling Inc. (DO), or better yet, the Nasdaq, you can see an endless number of gap ups in the pattern, with many of them very close together in price.

Gaps are areas of support that get bought up in bull markets. The more gaps you have the more difficult it is for the bears to get anything rocking. They get lucky enough to take out one gap, but then run in to another that gets bought up with force. Moving averages are key as well, but the number of gaps far outnumber the amount of important moving averages that are acting as support.

If you add the moving averages, along with the gaps that are protecting, you can understand why the job for the bears has been so tough. Printing press Ben is huge, but so are those gaps folks. Printing press Ben is the one who created them so the bulls have him to thank. Now those gaps are acting as wonderful support for the bulls as things sell off from time to time.

Let me give you some insight as to the strength of this bull market, although remember, at any moment we can have a strong pullback to unwind thongs. We just got one of those possible catalysts in Cisco Systems, Inc. (CSCO). Awful earnings report with the stock slaughtered from a percent perspective after hours. It's down 6% as of the time of this writing.

The reaction from the PowerShares QQQ (QQQQ)? Down six cents or three points. Seriously? In normal times, if Cisco was down 6%, the Nasdaq would be gapping down 40 points. Maybe more. The market simply is rotating its dollars to whatever is working, or perceived to be working. It tells you the bull market is still on, but we could sure use some selling to get things more to a buy point so numerous new plays can be taken on. One day at a time.

Be kind to someone simply because you can.

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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