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Stock Market Staying Overbought.....Making Sense Of It All.....

Stock-Markets / Stock Markets 2011 Jul 06, 2011 - 04:50 PM GMT

By: Jack_Steiman


It's not often you stay this overbought in a market on the short-term charts. There have been many attempts to sell things off, but once the RSI's get under 70, the buying starts right back up. This is only a once in a long while occurrence. The reasons for it are simple really. You're in a primary bull market until we can lose 1249 on the S&P 500 with some force. The bulls were able to defend this level a few times, and they have now cleared back over the critical 50-day exponential moving averages. Once you clear back over this critical resistance level turned support, the bulls get more aggressive on the buying due to the feeling of insurance that the 50's will hold. Only if they got taken back again by the bears would the bulls get less aggressive. In fact, with the reality that the bears lost the battle thus far, the bulls are feeling pretty good about themselves, and thus, will get back in new plays any time there's some decent selling, or even if it's not that decent it seems these days.

It normally would have been very difficult for the bulls to take back those lost 50-day exponential moving averages, but it wasn't all that tough this time once the daily M's made their bullish crosses from well below the zero line. All of this said, we are overbought, and thus, a decent pullback can begin at any time and no one should be shocked, or surprised, if we fell roughly 2% from today's closing prices. It doesn't have to happen right away, but if it did no one should say I didn't see it coming, because you should be prepared for selling at any moment in time. Markets are healthier once they unwind back down from overbought oscillators, so in some ways, you should look forward to some selling to help set up better entries on new plays. So while things look good overall, the market would be better served with some selling to unwind, while at the same time you have to feel good about the bullish behavior we are currently experiencing.

So where are the headaches in this market? Look no further than those horrific financial stocks, which gave up their recent breakouts over their 20-day exponential moving averages in many leading stocks. Bank of America Corporation (BAC), and especially JPMorgan Chase & Co. (JPM), were just terrible today. Both had easily cleared those critical resistance levels at the 20's, and after a few days above, gave it all right back with hesitation. A big gap down to put those stocks back in poor shape, if not a bear market. Not only is it bad to lose recently gained 20's, but how they lost them today is ominous at best. A large gap down that never recovered, even when the market turned up appreciably today after gapping down a drop at the open.

Those stocks just don't want to be owned for any length of time by the big money out there. I can't say I blame them with all the bad garbage on their books, but the fact that they had cleared and then lost right back, big resistance turned support is not a good sign for these stocks on any time frame. The best advice I can offer is to basically stay away from these stocks and focus your energy elsewhere. Do what feels right to you, but these stocks just can't seem to get out of their own way.

What is interesting is how the market is finding enough fear each and every day to keep the markets from falling too hard. For example, notice how every morning for the past few days to a week has some extreme high readings in the put-call ratio. Quite high with readings at 1.30, and staying near there for most of the day, although it calms down some as the day moves along.

However, it has stayed over 1.0 basically all day for many days now, and this shows many don't believe in the rally and are trying to load up on puts for the big sell off. Either that, or many are afraid of the rally not lasting and are buying protection with put positions. If you're a bull you like to see doubt. There is definitely doubt amongst the masses these days, and that's a good sign that'll prevent the market from collapsing when we do sell. If we see lower put-call readings all day, then we know we're getting too complacent, and thus, we can then expect a much stronger selling period. For now, the doubt is still strong enough, although we could use some selling to unwind things.

The market as it is here says exposure is appropriate. It doesn't say full in is appropriate. Markets such as these demand respect. You don't want to over play your hand. Play with a thought of making some money, but not playing with greed. Greed will cause you to do too much. It's as simple as that. Take positions in plays that set up properly and offer some protection from too much down side action should the market sell some. There are good set-ups everywhere, but not every sector is healthy, while others that are healthy need a pause to refresh. Find places where things are set up with MACD's lower down and trying to cross up positive. Holding overbought if you have gains is fine, but buying new plays at overbought makes little sense. Go day to day respecting what's possible such as the jobless claims report tomorrow. If it's bad we could really sell down harder. The big Jobs Report is pre-market on Friday, so again, be involved, but not inappropriately so.



Jack Steiman is author of ( ). Former columnist for, 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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© 2011

Mr. Steiman's commentaries and index analysis represent his own opinions and should not be relied upon for purposes of effecting securities transactions or other investing strategies, nor should they be construed as an offer or solicitation of an offer to sell or buy any security. You should not interpret Mr. Steiman's opinions as constituting investment advice. Trades mentioned on the site are hypothetical, not actual, positions.

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