Stock Market Spends Another Week At Overbought...Bullish Action Continues On....

Stock-Markets / Stock Markets 2012 Feb 18, 2012 - 06:52 AM GMT

This has definitely been the most interesting day of the year so far. The market tried gapping up again today, but that gap up took all the major index charts into overbought territory once again on those daily charts. RSI's near 80, once again, on the Nasdaq, with the S&P 500 also joining the party into overbought, with readings in the lower 70's. You just can't have the market staying overbought time-after-time after some small selling episodes.

It's not healthy. The rubber band, eventually, snaps, and down you go. Nothing was more overbought than both the daily, and 60-minute, charts of Apple. Scary overbought to be blunt. Apple's daily charts reaching 90-RSI, with the 60-minute chart reaching the unheard of mid-90's. I have warned when something becomes extreme--the price one pays can be devastating. Once again, that became a reality, with Apple snapping down nearly thirty dollars off the top. Look again. I said thirty (30$) off the top in, basically, an hour's time, if not less. That's a rubber-band snapping in two. The type of pain the average retail player felt on that stock today is unbelievable. The largest volume of the year on the reversal means the stock will struggle for consistent upside for a while to come.

With that snap down in the stock came a strong reversal in the market. The Dow was down nearly one hundred points today isn't terrible, but well off the top. The Nasdaq and S&P 500 following the same script. Not terrible selling in terms of numbers, but well off the highs for the day. So, the bears get a chance to breathe a bit here as Apple should put some weighting on the market as it tries to find a bottom in the days and weeks ahead. In the end, however, nothing terrible is going on technically with the market. Just some time to pause is all.

So many of you are probably asking and wondering what the nasty and brutal reversal in Apple means for the market. Will it be the end of the bull run? Will the market just fall apart? The answer is no and no. The market is absolutely fine, even if it falls 2-4% from here. There are great earning stocks all over the place that will help keep a bid under this market and prevent it from falling apart. That won't happen. The market has massive support levels based on trend lines, gaps, moving averages, and horizontal support. People want in and will buy the dips. The market will not fall to pieces here. Not in the least. It will offer up some very good buying opportunities over time, if you're patient enough to let things come to you. So many stocks will set up in their bases and patterns offering good entries.

Again, patience is the key. As each individual stock sets up, it'll be worthy of a buy. With the earnings reports being so solid overall, although there are the usual bombs of bad reports, and with the economic news so decent these days, the market will not crash out. Think about it folks. Apple fell, basically, thirty dollars this afternoon, and the Nasdaq was hardly down for the day as many other stocks stepped in and were bought up enough to keep things from getting too intense to the down side. There was no market free-fall. Just good old fashioned overbought pullback selling. Do not take Apple's demise today to thinking we're done with this market. We're not. Things will set up once again.

With the selling today off the top we already have the Dow down to 57 RSI on the daily chart. Some deeper selling would be bests for sure. The Nasdaq is moving under 70, and the S&P 500 is below as well. It won't take too long to get the market down to levels where buyers will want to come back in. There are loads of players on the sidelines who want to get their dollar back into this market. When you're in a bull market environment, you don't want to wait for oversold on the daily charts before getting back in, because, if you do, you won't be getting back in any time soon.

Markets don't get oversold on the daily charts in bull markets. They certainly do on the short-term 60-minute charts, but they do not on the daily charts. So, you don't want to let good opportunities get away when a stock sets up the right way as the market pulls back. There will be lots of great set-ups as things unwind further, so be ready to take advantage of them as they spring up in the days and weeks ahead. Don't become a bear just because Apple put in an important topping stick of its own today. That won't derail the market bigger picture just as it won't derail Apple overall in time. Stay awake and aware of the opportunities that are about to set up over time.

Let's hope this market does test lower, which will unwind things further. Great support on the S&P 500 comes in first at the 20-day exponential moving average at 1328. Then we get the big support area, which was that long-term down trend line now at 1315. It was at 1320/1325 when we took it out, but as it's a down trend line it is slowly sinking further, which is a positive for the market.
Below that there's still the 50-day exponential moving average to protect the bulls at 1293. Lots of good support also from gaps, etc. The bears will not have an easy job keeping the market sustainably down. Sure, some down side should be expected here, but it won't be anything too terrible, I don't believe. Let's watch stocks set up and see how these strong areas of support get handled.

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.

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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