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Stock Market Near Overbought Again....Not Yet At Bull-Bear Extremes

Stock-Markets / Stock Markets 2013 Feb 14, 2013 - 09:18 AM GMT

By: Jack_Steiman

Stock-Markets

It was surprising and good to see the bull-bear spread actually pull in a drop this week. Bears stayed the same, but the bulls dropped a bit, which allowed the spread to pull back 1% to 31.5% more bulls than bears. Maybe it doesn't seem significant, but it is good to see the sentiment dry up a bit, or else we would have hit that first magical red-flag level of 35%. It's not a sell signal at 35%, as it takes 40% to get that to kick in, but it's never good once you get to 35%. At 31.5%, however, you can still see quite a decent pullback, especially since many of the major-index daily charts are flirting once again with 70 RSI's. The mid-caps actually got decently above 70 RSI, while the rest are in the mid-to-upper 60's on average.



The point here being that the risk reward for new longs isn't great, but things aren't exactly great for the bears either. The message overall being a little exposure is fine, but not too much, and not too much in the world of very high beta stocks. When markets give little in terms of risk reward the tendency is to get bored, and when a trader is bored, that trader can be in some very deep trouble. Emotion takes over and you do things you know you shouldn't do. You do them anyway, and before you can blink your eyes you're no longer bored. Upset, but not bored. So take it easy and recognize the circumstances surrounding this market. Neutral is the word with some headaches at, or near, overbought, with some extended issues regarding sentiment.

Sequestration is close at hand, and this one appears to be a fight to death between the two sides as the Republicans have sworn not to give an inch this time around. They feel they gave way too much on the debt ceiling and are determined not to give anything here. They will allow businesses to fail if the democrats don't give in to spending cuts that seem necessary to the Republicans. They let those cuts go last time, but they won't this time. Here we go again folks, the Government playing hardball with us. We're used to this by now, aren't we? Ok, we're not, but you need to get used to it all over again as the March first deadline is approaching rapidly. If we get a standoff here the market will hate it.

Given the overbought conditions we've continually seen, and with sentiment a bit stretched, the market will take any excuse to sell off hard, and this could be the tonic to get this market rocking lower. The biggest cuts will come from defense stocks, so be careful what you choose over the next two weeks. They could also blast off if it plays out their way. But again, it's all about risk and safety. We will need to keep tabs on this issue each and every day as even CNBC is now posting it in seconds on the screen all day long. It's nauseating, but anything to keep folks interested, I guess. Bottom line is this issue won't go away easily, and could easily be the excuse the bears have been waiting for, so go slow here for many reasons. Never dull!

I talked about 1525 resistance. The high today was pennies below 1525. This doesn't mean we can't go higher, but the markets are a bit stretched, so we need to understand where the market would like to go if it pulled back. 1500 is now the rapidly rising 20-day exponential moving average. A tag of the 20's is normal protocol in any uptrend as time moves along. If the selling gets deeper, the 1470/1475 area will be support. I would expect us to hold on the first try of the 20's, but you never know. For now, we have hit the upper end of our range, but maybe we just handle out for a while to allow the oscillators to reset and gather bullish energy. If we move towards 1500, then we see what the shorter-term charts look like, and then go from there. One step at a time.

The Nasdaq did break out above 3195 resistance today, but failed as the day went along. It's possibly another hint that things need to sell a bit for a while. Time will tell. Either way, whether we sell for a while, or not, bigger picture, the bulls are still in control. The Fed is making sure of that 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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