Stock Market Remains Firm At Overbought But Slowly Unwinding Levels

By: Jack_Steiman

What can I say about this market. It is resilient beyond words. And it is somewhat surprising when you consider just how overbought we are on those daily charts. We started off with selling today, and it looked like things could finally be coming together with respects to more sustained selling. The Dow was closing in on 100 points, which is nothing really, but at least a start. That didn't last long though. The market started to slowly, but surely, come back from the early deeper selling. No great move higher, but enough to take away the edge from the bears. The bears have to be wondering what will it take to get this puppy moving lower. I wonder as well.

It would be so much better if this market took some time off for good behavior and let things cool off, but those dip mentality buyers keep coming in off the side lines and holding this market up. Day after day it tries to sell some but it doesn't follow through. But don't be shocked when the day comes that we do sell hard all day, if not for a few days in a row. It'll happen, but trying to time it is absolutely impossible. Most thought it would happen long ago. If you play against the trend you are getting hurt and today was no exception to that rule. Bottom line is today wasn't bad if you're a bull. At least we unwound some. Better than nothing, but more would be better for sure. It would make buying easier on the soul.

Perfect little pullback in the financials today on decreasing volume. Nothing heavy but it allowed for their oscillators to unwind some, which is an absolute necessity. This sector has finally joined the party and is actually one of the best looking sectors around. Hard to believe I'm saying that. I have to check on myself after I do. From the worst to one of the very best. For now! Hard to trust those stocks, but you never fight what the market is saying. I love when sector ETFs unwind without a lot of volume. If the volume is too heavy it puts things in to question. For now we don't have that, and thus, we take today's action as more bullish. As long as the Direxion Daily Financial Bull 3X Shares (FAS) holds above 24.00 it's on the bullish side of the ledger. If it lost 24.00, and that would shock me to be blunt, that would be more bearish behavior. For now, all is good there and it shouldn't be too much longer before we see that sector try to come back alive.

The dollar is now rallying back up from oversold and some positive divergences, but it's not having a major effect on the market as the market is responding more to the good news that came out from last week. The excellent news from the ISM Report along with good election news helped a lot. What helped the most was the solid Jobs Report that has most believing the worst is behind us. That's what keeps this market from falling too much and why we are still getting a buy the dip mentality. The dollar can rise some without the market getting hit too hard it seems, although we all know it's overbought and that alone can give us a 3-5% pullback at any time. It was good to see the dollar rise today, but also watch the market hang in there relative to the dollar's performance.

If the S&P 500 has topped near-term. It does put in a handle over the next several weeks to months and will have a positive effect in the following way. When markets are in a strong up trend and suddenly it stops because it's overbought and made its measurement, many will confuse the lateral to downward action as a signal that the top is in. It doesn't take much to get the bears thinking that the all clear is now in because we've stopped moving higher with force. That is exactly what the bulls want and quite frankly, need.

You can't keep going higher in to overbought and expect sentiment to remain favorable for very long. I think we're likely in a phase where we move more laterally, and I think this will be very beneficial for the bigger picture. I can tell you it won't take more than some days to hear that it's all over from the folks who want it and need it to be. Don't get thrown off the track just because things aren't feeling so good short-term. However, I can tell you that you should be less aggressive than you have been. Plays do set up and they can, and do go higher, but it won't be easy short-term, so doing less is more.

Again, I'm not saying you can't or shouldn't play, but make sure things are set up in the stock so that if the market does pull back another 3-5% from here it can withstand the selling without getting crushed. Safety first, should be more of the way you're playing now. Strong support comes in from 1195 down to 1188, so let's go easy here and just play the way we have, which is to pick up stocks as they become more attractive technically and hold through the selling days.

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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