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Stock Market 70 RSI...Red Flag....Oil Strange Week....Transports Very Weak......

Stock-Markets / Stock Markets 2012 Sep 22, 2012 - 03:07 AM GMT

By: Jack_Steiman

Stock-Markets

Let's start with oil. The price of oil started creeping up, it seems, in anticipation that Mr. Bernanke would do QE3. It was moving closer and closer to 100$ per barrel. Not a good sign for a clean break above 100$ had the commodity moving towards 110$. I need not tell you how bad that would be for our weakening economy, our rapidly weakening economy, at that. The Fed didn't let the masses, he fooled me, and gave the world QE3. Oil blasted up initially, and you could hear the moans of what it meant to be clearing 100$ a barrel. Suddenly, and seemingly out of nowhere, oil absolutely plunged. It needed to plunge, and plunge it did. Manipulated? Who knows. It's certainly possible, but it was good to see it fall, and fall hard. It's down huge for the week, and now, well below that magic 100$ level.



It appears as though someone is going to be sure it doesn't break above, for if it does, it would cause mayhem for the masses. That's something the Fed, nor anyone else, wants to deal with while things get worse economically. We need stable prices in all commodities. Inflation is a word that no one can deal with, and thus, it's not only oil, but the price of food, health care, and everything else inflation can make ugly for Americans. If QE3 works, it seems impossible for inflation not to leap out and nail the masses. But then again, maybe it'll have a smaller impact if things actually do improve in the economy. Of course, QE1 and 2 did nothing for the economy, so I wouldn't hold my breath. At least for now the price of oil has stabilized below that key triple digit level. That's a sigh of relief for everyone, especially our Government leaders.

When the Dow makes new highs along with many other key indexes, the bears will turn their heads to the old Dow theory of whether or not the transports are confirming price on those key indexes. The transports are, not only, not confirming those prices, but are on the precipice of a massive break down out of a longer-term base. That would certainly be a strong negative for the market as it represents the slow-down everyone is fearful of in our own back yard. We have had many severe warnings in the sector lately from Norfolk Southern Corp., a leading railroad carrier to FedEx Corporation (FDX), the leading air transporter of packages and goods.

The warnings, instead of being mostly ignored, have really driven down those stocks, and the stocks within that sector. Union Pacific Corporation (UNP) and Kansas City Southern (KSU), along with all the other rails have taken a huge hit since the NSC warning, which is no different than what has happened to United Parcel Service, Inc. (UPS), since the FDX warning. Another sign of a red flag as quite often the other stocks within a sector do not take big hits. But this time they have, and have done so on big, confirming volume. We need to watch the transports next week to see which way it breaks. Again, it's right on the edge. This is where it's do-or-die time for that which is of the market. If the transports break down, the market will have a respectable pullback.

When all the key index charts get to 70 RSI, you have to start getting nervous about complacency and overbought conditions. Add the weekly charts to overbought, and you really start getting nervous. The weekly charts have between 68-70 RSI's on the key index charts, while the daily charts have 70-71 on those RSI readings. Weekly and daily overbought together often bring about sharp declines to unwind things. Even if it's not sharp, at the least, it's choppy but lower in the trend. You will have to unwind things at some point. There's no way around it. Even if you go to 75 RSI's, at some point it's going to snap down. There's no way around it. With the constant spread in the bull-bear percentage widening, you have to be concerned here and start taking steps to raise a bit more cash. Do what feels right to you, but be warned about the risk reward up here. It's not great for the bulls, even if we stay overbought a bit longer.

It's been a nice, choppy-type run up in the market. You certainly can have some exposure if you're in stocks that have gains. Maybe the market will hang in there a bit longer anyway, but good stocks and gains can handle a pullback. That said, you will find excellent support on the S&P 500 from 1440 down to 1425. I would find it hard to believe the market will just melt down through that area of strong support. With the Fed protecting it, it seems all pullback's are basically related to simply unwinding overbought, somewhat complacent conditions. Buying weakness can be done for sure. If you buy stocks, use weakness in stocks with MACD's near the zero line on those daily charts.

Don't buy overbought, high oscillator set-ups. Keep it a bit lighter for now.

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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