And that's really good news if you're bullish on the market. It's unhealthy to stay overbought for too long as you have to sell at some point to alleviate some complacency and constant 70, or higher, RSI readings. We have stayed near 70 RSI for a week, or so, and if you go back three weeks, most of that time was spent near the 70 RSI level on basically all of the important index daily charts. Not good bigger picture. You want things to sell so folks get bearish, and so we can get those RSI's down to the 50 area. That's just what's taking place now. The Nasdaq is actually a few points below that 50 RSI mark. How fast you can get there with a 2-4% pullback off the top. The Dow and S&P 500 are averaging near 50, and this is good as it washes out optimism. We can sure use that for a few weeks, if not longer.

We had another gap down today, and immediately, the put-call ratio spiked to slightly over 1.0. That's better than those .50's we were getting a week or so back. After falling hard, and getting oversold on those short-term 60-minute charts, we saw the market try to rebound as many RSI readings went below 20 on some leading issues, such as Apple Inc. (AAPL) and the SOX (Philadelphia Semiconductor) chart. Those are a bit extreme, thus, they closed off their lows and allowed the market to do the same. In the end, it was a good day as things unwound further without too much price erosion. A necessary event and the bulls should be happy about it.

I had recently spoke about some red flags that were appearing. One them was sentiment as the bull-bear spread got to 29.7% more bulls. I spoke about how 30% was a red flag. Not a run to sell all your stocks red flag as that happens as you get towards 35-40%. However, 30% is getting up there. Today we saw that number improve a bit for the bulls as it came down to 26.5%. Not the best reading in the world but as least it's a start to be sure.

A week such as this week can take that number down faster than you think as it doesn't take much selling at all to get people to sour on the stock market, especially since many have been badly burned in the past decade with those nasty bear markets they've dealt with. We could see readings at least a few percent lower by next week which would really take us decently away from sentiment starting to become a problem. Markets don't have to move much to the down side to get folks wanting out and feeling as if it'll never go up again. So this week's action, thus far, has probably gone a long way towards getting sentiment back in the neutral area.

I've talked about this subject recently and it must be watched closely in the future. I'm talking about the lack of power in the market on commodities since QE3 was announced by Mr. Bernanke. Instead of blasting these stocks up, they have fallen quite a ways, especially areas such as steel and oil. Is it simply because of those 70 RSI's, and the market needed to sell, or is it something different? That's what we need to learn as the days and weeks move along. If it's because the world is waking up to the reality that neither QE1 nor QE2 have done anything positive, then these stocks are in big trouble and it may be a sign that things are much worse than we all collectively recognize, for now.

The economy is still contracting after tremendous, unprecedented stimulus, thus, why get excited about adding more, may be the way folks are responding now. Makes sense to me, but what makes sense to me is meaningless. Only what makes sense to the market is what truly matters, thus, we're in a watch and learn phase of this market, with regards to its longer-term reaction to QE3. So far the Fed and the market can't be too happy about what it sees. Only time will tell the truth. It's interesting times for sure.

In closing, we watch to see how the market ultimately handles great support from 1440 down to the 50-day exponential moving average currently at 1414 on the S&P 500. The market, if it is truly strong, should hold no worse than the 50-day test. If that gets broken with force on big volume, the bulls are in trouble. I don't think that's what we'll see, but you have to be prepared for all possibilities in this crazy game. We watch very closely here for more insight. So far the market has done what it needs to do, and a little more selling wouldn't be a bad thing at all.

Hang in there patiently for now.

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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