Stock Market Overbought...Action Positive....Pessimism Unwinding

Stock-Markets / Stock Markets 2015 Oct 31, 2015 - 06:10 PM GMT

The market has hung in there very well. It has been at or near overbought for quite some time. Thankfully, it's not severely overbought, but it is overbought nonetheless. It's staying overbought as the market awaits the big report out on Tuesday morning. The ISM Manufacturing Report. The market is in a hopeful mood it seems. It's hanging on to hope that the number is over 50.0, or the number that separates recession from growth. If the number comes in below 50 then look out below. If it's above 50 the market should hang in well, instead of pulling back from 70 RSI readings. The bulls are also decently happy over some of the earnings reports that have come out lately. Some nice, upward surprises have taken place in various areas of the market, allowing for some buying across the board, although there are some real lagging sectors to be sure.

It's not a clean market. It's not giving easy gains across the board such as it did for many years. Those days are over for years to come. You have to be smart, and quite lucky, as things change from day to day based on news or simple rotation. What's good and bullish looking one day isn't the next. What's awful one day can reverse right back up just because it can. Again, rotation. So the market is rotating around and is playing on hope. Not the best combination in the world, but that's the new game in town. It says to be careful and to buy something that has unwound on its oscillators. Buying strength isn't the best way to play anymore. It can work, but the risk reward isn't best. Play smart with the appropriate amount of fear to make sure you don't overdo things.

The market is heading toward the old highs after clearing gap resistance on the S&P 500 between 2076 and 2079. It doesn't necessarily have to hold this level should the market pull back, since the gap has been properly filled. The important thing to understand is the market is heading towards the old highs, but will be doing so at overbought, thus, the odds of clearing 2134 any time soon without a decent pullback first is small. It may get towards that level, but would need to sell before trying to break through, which it still has an excellent chance of doing over time. If we do get that breakout, it will be in to long-term, massive negative divergences, but we'll deal with that happily if we ever get that high. Again, a lot of that will hinge on whether the ISM Manufacturing Report is acceptable or not. We may just pull back from here first and not get into the 2100's. Either way this goes, I do believe a move at least to the old highs are likely and again, if not decently above.

Let's discuss the ISM Manufacturing Report. This will be very interesting. Many individual states are reporting negative readings, although Chicago today reported a nice surprise higher than expected. It's mixed throughout the country, but that's normal as things do vary quite a bit from state to state, and more importantly, from different parts of the country. All of these different reports make understanding the bigger picture of the whole country very difficult. It wouldn't shock me if we get a reading below 50, but at the same time it also wouldn't shock me if we saw a reading decently above 50 or better than expected. This is the toughest ISM Manufacturing Report to figure out ahead of time that I can honestly remember. With so much on the line it makes things very uncertain. It should be a fireworks report, and it does come out thirty minutes into the trading day on Tuesday.

Folks will be placing their bets during business hours. Shorts are still quite high, and, thus, there's plenty of fuel for higher prices towards the old highs if the number surprises on the high side. No fun to have a report mean so much, but we have watched deteriorating reports for quite some time now, and, thus, this market needs a bit of good news on the economic front. A very important and interesting week is ahead of us. Nothing is easy from here on in.

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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