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Finally Some Selling From Extremes Of Overbought.....

Stock-Markets / Stock Markets 2012 Feb 11, 2012 - 12:06 PM GMT

By: Jack_Steiman

Stock-Markets

Best Financial Markets Analysis ArticleNot a single soul should be shocked by the fact that we sold off some today. The market had been extremely overbought for quite some time. The Nasdaq, and small caps, had gotten absurdly overbought on their daily RSI's, with readings at 80 plus. That's basically unheard of, folks. It's been a long time between visits to this territory for any part of the market. It makes sense that it would happen in froth-land, otherwise known as the technology world of the Nasdaq. Froth leads when things get silly to the upside for our stock market. People want to participate in those rapid moving high beta stocks when the market is rising, because they want to capture as much upside as humanly possible. Get me those points. Don't give me those slower moving safer stocks. Give me beta or give me.....!



Anyway, folks chase froth, so while the S&P 500 and Dow had overbought RSI's as well, they couldn't come close to the level of overbought seen in the Nasdaq, especially since it houses the stock of all stocks, Apple Inc. (AAPL). Apple's RSI on the short-term 60-minute chart coming within a hair of 100, something I've never seen before in my lifetime. Can you say parabolic? So yes, beta was on the loose and thus, the Nasdaq world led the way higher as a healthy Disneyland market tends to do. The market had stayed overbought for way too long, and you know at some point, the rubber band will snap. It doesn't mean market death, but it does tell you to book some gains along the way, knowing things will be forced to unwind at some point in the very near future, especially when you see an 8 as the first number in the RSI world.

So, the process is now under way. How much selling will we get? Probably not too much, but some at least get things out of the silly-land of 80 RSI's. The Dow and S&P 500 are now out of 70-territory, but not the Nasdaq. It tells you to be very careful for a while to come. With a buy-the-selling routine in this market, things should hold up reasonably well for a while longer. Just remember that it gets tougher, and tougher, to move markets appreciably higher as long as you're in the neighborhood of 70 RSI's on those daily index charts.

The most surprising thing to me has been the strength of the markets in Europe. Many of them are on breakout and that's, quite frankly, hard to grasp, or understand. When markets want to be hopeful, they certainly know how to party. I don't think the action overseas warrants it the way it has shot up, but you never argue with the message of the market, any market. The action tells you that Europe is thinking it'll get whatever it needs in terms of an influx of dollars to be sure things do not default. That's not really good news longer-term, but the markets there, nor here, care whatsoever. At least they don't for now.

I get the feeling that, down the road, they will, but we don't need to think about that for now. Let that happen as it will through time. For now, with Europe living on hope, and without markets working higher based on better earnings reports, and much better than expected economic reports, things are still quite favorable for our markets for a while to come. Things can turn very quickly, if economic reports start to deteriorate, but for now, we see manufacturing rising, and jobless claims falling, thus, we should expect things to hold up until that changes.

When things turn back up, we will learn a lot more about the overall health of the market. This move off the bottom has been led by, basically, everyone in every sector we can think of. It's a very broad based rally that has everyone participating. Will that be the case on the next attempted rally? I don't know, and have my reservations this will take place, which it really needs to. Momentum indicators will lag badly if we see fewer and fewer stocks leading the way. It won't be good if Apple keeps going parabolic, while the advance-decline line is fifty percent up and fifty percent down. We need to, once again, see the majority of stocks leading the way, or that will raise a classic red flag that the market rally is, overall, about done, and that we should soon expect a strong period of selling. It's an unknown, of course, at this moment as we will need to watch the next decent rally, and get the necessary evidence. It will be a critical thing to follow, however, and it will be important not to turn a blind eye, if indeed the rally is led by fewer and fewer winners.

The Nasdaq has led the way as it should. I spoke about that earlier in this letter, therefore, it's important to watch and see, if, in time, it starts to print a negative divergence on its daily chart. It'll need a bigger move lower than this to set up a true negative divergence. A move this few in points to the downside is not enough to establish a bad divergence. We'll need a more prolonged move down to set the stage up for a final top for several months. It'll probably take quite a bit of time to have this whole scenario play its way through the system.

Patience will be needed by all to allow this set-up to become a reality. In the meantime, S&P 1321 down to 1315 is critical support. 1350 to 1370 is a zone of resistance. Below 1315, we have 1292 as strong support. We have a lot to learn over the coming weeks to see what will set up. For now, the bulls need to defend 1315, or the longer term down trend line, the bulls just took out.

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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