70 RSI's... AAPL and IBM... Pullback Time Is Here......

Stock-Markets / Stock Markets 2010 Oct 18, 2010 - 07:20 PM GMT

No one will argue that it's inappropriate for this market to sell off here. 70, or higher, RSI's abound on all the major daily index charts. The NDX as high as 77 today. That's just unsustainable for a very long period of time, even in the best of market conditions. The market starts looking for a catalyst and it found it big time after hours this evening.

Disappointing figures from Apple Inc. (AAPL), VMware, Inc. (VMW), and International Business Machines Corp. (IBM) have the futures quite a bit lower tonight. The Nasdaq is showing roughly a 40-point drop at the open tomorrow, but we have all night for that to change in either direction. A strong pullback is exactly what the market needs. Make no mistake about it. Even though we're slightly long you should rout for some selling, which will allow for things to calm down on the oscillators, and allow for much better entries down the road.

Buying near, at or above 70 RSI on the index daily charts, gets old and you have to force yourself not to do too much. If you're appropriate you simply aren't playing very much and that can be boring, but it's the only way. Remember, please, that overbought is NOT a sell signal by any means. In addition, you don't short at overbought because it can stay that way for a very long time. You keep some exposure due to that possibility, but you don't get aggressive. At some point the rubber band snaps.

Tonight we saw the snap take place in the form of earnings from VMware, Apple, and IBM. There are others in the morning in the financial world from The Goldman Sachs Group, Inc. (GS), and Bank of America Corporation (BAC), thus, more fireworks are on deck before the market opens. Bottom line is the catalyst arrived tonight, now we sell, and hopefully, we don't come right back, thus, allowing for deeper unwinding on those oscillators. We'll take a small hit on our plays, but that's fine. It's better for the market to sell now and set things up better for the future.

The good news today was from the world of financial's. Good to see some decent earnings numbers form C (Citigroup). The stock moved decently higher for the day, which also helped to carry the recently broken brothers and sisters from this area of the market. The financial's have been the great laggards, but for today at least, things improved there, which offers hope for them going forward although we have to deal with big reports from Goldman Sachs, Bank of America, and Wells Fargo & Company (WFC) over the next two days.

Once these stocks report we'll know much more on whether today will be sustainable. If the rest of these stocks can report good numbers this will help the market sustain deeper upside in the weeks and months to come. If they fail badly and break down then we could have seen the highs, although I doubt that's the case. Now the semiconductors will get a good test. They have broken up nicely over the past several weeks and are very healthy from a technical perspective. With Apple and IBM warning a drop on things, we'll watch closely to see how these stocks hold up as they're directly related to these stocks, especially to Apple.

If there's a perceived lack of demand from Apple then the branch stocks, or those connected to Apple, may take a bigger hit than Apple will take. The little guy always gets it don't they!! if these stocks can pull back just a bit, and hold well on the oscillators, this will tell us a lot about their immediate future and how the market will be able to recover from tonight's misses. Once again, it seems we're always having to watch those financial's and semiconductor stocks.

We have great support at 1060 on the S&P 500 and then down to the 20-day exponential moving average at 1155. Below that we have 1131, which is the big breakout level. That's now joined by 1130, or the 50-day exponential moving average. 1113 is gap. The market has tremendous support underneath to help protect it from too much selling, but it's more than normal to back test those 20's or even the 50-day exponential moving averages when things get very overbought and you finally have a catalyst to get things moving downward. This selling should ultimately lead to good set-ups that have unwound to where we want things to go on the oscillators.

It's time to relax and be patient. Things will set up here if they go as I expect them to go. We're only in two plays and this will help take some of the sting out of things. Welcome the selling even if it brings some pain to our plays short-term.

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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