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Handle.... Stock Market Remains Overbought....

Stock-Markets / Stock Markets 2013 Jan 29, 2013 - 08:50 AM GMT

By: Jack_Steiman


And overbought is overbought, which means, at some point in the not too distant future, the market is going to take a decent hit to the down side in order to wash away the overbought oscillators. They will need to reset some point soon, so don't be shocked when the Dow has a triple-digit down day in the near future. It doesn't mean we don't go higher first. It just means the upside action is limited for a while, until the market can gain more energy from the overbought oscillators. The longer you stay overbought, and the more overbought you actually get without unwinding, the more intense the selling is when it hits. We saw that in many stocks today that took some devastating hits on either a simple downgrade from overbought or simply because they were violently overbought with RSI's ranging from the mid 70's to as high as 90.

Netflix Inc. (NFLX) has a 90 RSI, and took a massive reversal lower intraday off that reading, 15 off the top. Incorporated (PCLN) also took a powerful hit. There were literally dozens all over the market place that had strong, powerful hits to the down side due to extreme levels of overbought. If the market stays too overbought for too long the downside move will scare folks. It will be swift and very intense, with sticks that'll make upside difficult for a week or two. Maybe that's what's in store. We shall see, but those RSI's have been hanging above 70 on the major index charts for quite some time now. Not the best for the short-term.

When looking at this particular market, you recognize that when you're in a strong up trend you need a catalyst to get the market moving down off overbought. There are some real potential events coming up this week that could get the market to move down. First of all, we have the Fed with their statement on the economy this Wednesday. Last meeting we heard many of the Fed Governor's saying they wanted an end to all QE programs as the fear of inflation was causing problems. They fear folks who are struggling will have the extra headache of rising food and health costs, thus, they are anxious it seems to put an end to the free cash flow.

If they become more vociferous this time, the market could use that as a phony reason to sell. If not that, we could see selling on the Jobs Report and ISM Manufacturing Report this coming Friday. Surely, the market could find something bad even if the news is good, such as, well, now the Fed will end the QE programs really soon, etc. All nonsense, but when the market wants to do something it will most definitely find the excuse, even if it doesn't really exist. We shall see in the days ahead.

Every market has good and bad sectors. In this bull market we have seen individual stocks and various sectors struggle along. Apple Inc. (AAPL) is now in a deep-bear market that, at least, bounced from oversold today. That said, it's in a bear. Make no mistake about it. When looking at various sectors within the market, gold miners, coal and natural gas are in deep rooted bears. Playing them and hoping they'll snap out of it doesn't make much sense. Stick with the sectors that are working best, especially on weakness, and buy the best stocks off their earnings reports when they pull back to support, or at least unwind some from overbought.

The market is fine and should try higher in time, but please, recognize it is overbought, and thus, a strong pullback can occur at any moment. Keep some long exposure, but buying future weakness is best in terms of adding to your long plays.



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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© 2013

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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