Overbought Stock Market Corrects on Positive Fed Statement
Stock-Markets / US Stock Markets Sep 24, 2009 - 02:41 AM GMTBy: Jack_Steiman
The market has been very overbought for quite some time. Sometimes it gets ridiculous to be blunt. Staying at levels of overbought you just don't see very often. We can see that, not only on the index charts, but on many regular stock charts such as Apple Inc. (AAPL) and Google Inc. (GOOG) to name just a few. Both of those issues printed, on the daily charts, RSI's just under 80 today. That's just silly. These readings can't go on forever.
The daily charts reached as high as 76 today, led by the Nasdaq 100 and NDX. Stretching that rubber band awfully far if you ask me. At 2:15 Eastern Time we got news from the fed meeting and it went exactly as the market wanted it to. Federal Reserve Board Chariman Bernanke said he was going to leave interest rates very low for a very long time. No change in the foreseeable future. He also said he saw strong improvement in the economy, etc. I mean he could not have been more on the side on the stock market, and it responded, only making it that much more overbought.
When all the good news finally comes out, we often see that reversal bar down the market had hinted was coming based on those oscillators. The market finally said no more. It snapped with the Dow falling 150 points in the last hour. Just when everyone was loading up on the fed news, the market put in a near term top for some time, probably weeks or longer. A massive move lower in the last hour on huge volume causing an engulfing candle that took out many small up sticks from the past few days.
Bad news for the bulls near term. This does not mean that the overall up trend has ended. Not at all. It does suggest strongly, however, that we won't be seeing S&P 500 1080 any time soon. This is why I refused to get aggressively long this market. Some exposure has always been necessary as we have grinded higher the past few weeks. One hour of action wiped that all out.
The risk was increasing with every point up. I know it felt like it could never correct but it always feels that way at short term tops. The market grinds, fooling the masses in to thinking it won't ever go down and then splat. Imagine being fully invested today at the top. No fun. Bottom line is today's candlestick is very bearish short term. It doesn't mean we just fall out of bed, but upside will be very difficult here. There will be up days but nothing great near term. Closing at the lows today says buyer beware near term.
The next question is whether something bigger is taking place here. There is a very bearish chart we are going to show you tonight. Take a look at the Oil Daily Chart, iPath S&P GSCI Crude Oil Total Return Index (OIL). (See chart at: Jack's Wrap at SwingTradeOnline.com.) It broke down out of a long term triangle today which is a hint of deflation, not inflation. If that chart is expressing deflation, where are the earnings in corporate America going to come from? That chart is nasty. It can always come back but that is a deflationary chart that does not bode well near term for sure and possibly longer term as well.
Baltic Dry Index (BDI) shipping rates are down 50% over the past four months and is often a leading indicator. This indicator bottomed out in December, four months before our markets bottomed out. This has now turned down for four consecutive months and could be a further warning sign that we're headed towards deflation folks. If there was pricing power and the economy was truly turning up as many say, why is this turning down so hard!! This chart is available for viewing tonight as well.
We held at the very bottom of the S&P 500 gap that runs from 1060 to 1080. We were never able to clear the top and this was a warning sign. We are at 1060 but it's very likely we will be losing the gap for some time. The gap was just too powerful from last October. It was truly amazing that we were able to climb up towards the top of that gap but the bears threw everything they had at it and now it's going to go away.
Normally you fail the first time anyway thus this shouldn't come as a shock. The real question is whether we will challenge the top of it again or not. The daily charts have already begun their unwinding of those nasty oscillators thus you get the feeling that in time we will make another run but there's no guarantee of that taking place when you see the oil and the Baltic Dry Index behaving so poorly, especially the triangle breakdown in oil today.
So where can we find the next level of critical support? The S&P 500 has the 20- day exponential moving average at 1042 and rising slightly each day. If this level were to go, that would be a troubling sign for this market. Truly healthy markets do not lose their 20-day exponential moving averages when their intent is to go higher over time. It acts as a wall of support so we will need to watch this very carefully in the days ahead.
Below 1042 we have that gap at 1018. You would think that this level should hold if we lose the 20's, at least on the first try. This is a funny game meaning there are no guarantee's on anything. A long reversal stick such as we saw today that engulfed a lot of the previous bullish up days says we could see that 20 day-exponential moving average. We'll just have to study and watch. On the up side1080 is massive resistance but we won’t have to worry about that in the near term.
Now is the time to think capital preservation. This is not the time to get greedy. This is not the time to be cute about playing aggressively long. The market put in a bad stick today folks. A high volume engulfing reversal at the top of the S&P 500 gap. Not good. Shorting is best but I won't short a confirmed up trend still in place. There's so much support close by but for now it's best to think in terms of cash and going slow.
We have to see just what today's nasty sticks mean for the short to medium term. Watching 1042 first and then 1018, if necessary. The gap is likely to be lost in total by tomorrow. 1060 should be gone sooner than later and this means starting all over from lower levels. Nothing will be easy here for the bulls short term so relax and breathe. Let's see if the selling is such that we don't lose our buy signal off the March lows.
This is the time to study and learn.
Peace
Jack Steiman
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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