Range Bound Stock Market Overbought

By: Jack_Steiman

The daily charts were very overbought a few days ago but selling has taken them down off very overbought to a more neutral position, but if you want to be exact, you could say they're still a bit more on the overbought side. The 60-minute or short-term time frame charts are now very oversold. Three days of selling will do that for sure. This should equate to some move higher early next week but don't expect the moon on any move higher. That isn't likely to take place until we get a more intense unwinding of those daily charts. Probably to, or near, oversold so that's not happening any time soon.

We gapped down again today after the overseas markets took another hit. We spent the rest of the day moving slowly lower but eventually rallied a bit off the lows as we got very oversold on those short term charts. Nothing rousing back up but a bit off the lows as the rubber band is starting to stretch short term. In addition, the Nasdaq closed on an almost perfect doji off the three day down move down and both the Nasdaq and S&P 500 closed with hollow candles meaning they had on balance buyers once the gap down took place suggesting a small bounce back up next week early on. Again, small not large. With some negative divergences in place you can't expect much to the up side but you also do not want to short a market that is this oversold on the short-term time frame charts.

The market action for the week overall tells us what we have known for quite some time already. The fact is, we're in a lateral consolidation that can't make it through the top to break out but isn't falling all that much to satisfy the bears. A market that if over played will frustrate both sides. It says to play very lightly. One to two plays maximum at any time here. Cash remains king near term. There are lots of sectors that are "breaking down" but really all that is to be clear is breaking down off their tops. Some trend lines and wedges broken but their longer term technical patterns still remain in decent shape. Some sectors aren't breaking down even off their latest move up. Just basing.

Sectors like the Transports and Commodities. It's a very mixed market which is exactly what you see in a market with no clear trend in place for the very short term even though we're technically still in an up trend overall. It's been a few months of back and forth and each week we see something else performing well while another part of the market pulls back. What looks good today isn't all that great tomorrow. On the other hand, what is wonderful today, such as commodities were early this week, were terrible late in the week. Bad enough to get very oversold on those short-term time frame charts after just being very overbought on those same charts just a few days ago. This is a market that folks call tired. It's not really all that tired. Basing often gets confused with tired when in reality it's just re-setting the oscillators. A tired market is one that takes a big hit. Where no buyers show up. We're not seeing that. We're just seeing rotation and thus consolidation. Keep that in perspective.

Volume on the way down hasn't been heavy. Some were complaining that the up volume wasn't great but the bulls can argue just the opposite. No real selling volume. Truth is, in a lateral consolidation, you'll see less volume because there’s less participate in this type of environment. Many big traders are waiting for a break out of the consolidation before taking big positions. It's normal, even in other times, to not see big volume until some critical level of support or resistance is taken out. We're not seeing that thus you're just not seeing too much volume. It's important to not make an issue out of something where there really isn't one. Nothing bullish nor bearish here regarding volume trends. In fact, nothing to talk about at all in reality.

With the 50-day exponential moving averages still a ways below today's closing prices, no real alarms should be going off regarding where this market is. It's important to keep things simple and not to over think things. That's where emotion comes in and ruins the day. We are in a pullback off the top of the wedges. That's all for now. If that changes I'll adjust to it. I won't worry about what doesn't exist and isn't showing any real sign of saying it will. Stochastics got up near 100 on the last market rally across most of the major index charts. That's a sign of strength, not weakness. It's far too soon to start drawing a bearish picture many are intent on drawing. There is just no real evidence to support the end of the bull run scenario at this point in time. It doesn't mean to get aggressively long as we know there is risk and we are overbought some on those daily charts. The message is clear. Nothing aggressive. Don't get too bullish but definitely don't get too bearish. There is nothing suggesting we should.

Sentiment Analysis:

The market continues to show the bears are alive and kicking. Basically, we have par there and that's never a great thing for the bearish case near term. The bears need to see a large ramp in bullish behavior to get this market to go their way for longer periods of time. Sentiment remains a friend for those who are more bullish.

Sector Watch:

This week we noted a few key groups breaking down through important Trendline Supports. Of note was the Semiconductor Index, which was under heavy pressure during the week. The Home Construction Index also broke through its March Lows Trendline Support. The Financials remained somewhat labored with the BKX forming a potential bearish flag pattern tucked just below our 50-EMA which is providing some resistance. We posted a Goldman Sachs chart below (see 6th chart) which showed a late week breakdown move through our 8-Month Rising Support Line. Goldman tends to be a leader for the Financials and will need to be watched carefully near term. Most Commodities remained relatively flat for the week although both Gold and Silver continued to advance higher along with the Pharmaceuticals.

The Week Ahead:

We will be watching quite closely to see what type of bounce we get early next week to see if we're headed for lower prices as the week rolls along. That wouldn't be a bad thing and would actually be good for the market overall as long as those 50-day exponential moving averages hold as I expect they will. I don't think you're going to see anything exciting from the bullish perspective as deeper selling will accomplish a necessary goal for the bulls, which is to unwind those daily oscillators much further. We're off Thursday for Thanksgiving, and I believe Friday is a half day. Volume for the week will be very light but markets can move quite a bit on lower volume, so there should still be some decent volatility. It's yet another week for learning about the future market direction. Travel the road quietly. Go slow. A play here and there. Save most of your capital for better opportunities that will preset themselves down the road.

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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