Stock Market Rapidly Approaching Long-term Resistance.......

Stock-Markets / Stock Markets 2011 Feb 19, 2011 - 06:01 AM GMT

What a great ride this has been for us. Fun for sure. Bigger picture, as long as printing press Ben is active, the fun should last a lot longer. That doesn't mean the market won't take some time out to pause and sell down some. There are a plethora of reasons to expect a sell off some time soon. The three primary ones are major resistance on the Nasdaq (chart included) at 2861. Add strong resistance on the transports and small caps (charts also included), and you have a lot of sectors close to major resistance. The second reason is overbought daily charts, and finally, you have confirming, very overbought, weekly charts on the major indexes. RSI's in the upper 70's on the Dow and S&P 500 on those weekly charts. Stochastic's a hair under 100. It doesn't go higher than 100.

The froth is building. We've loved every second of it, but the froth is getting old and still building. You can see the primary reasons to think we'll sell off soon, but again, you never short a primary bull market, because you simply can not time the moment the move will begin. You can go very broke waiting. This doesn't mean you shouldn't, or can't, start raising more cash. I believe you should. Again, no shorting, but short-term it doesn't make a whole lot of sense to be going ultra long. It's best to be cautious, because historically, the market has had some very nasty pullbacks when the oscillators have gotten this high for an extended period. On the weekly charts in particular. Can take another week. Who knows, but again, not getting overly aggressive, because the risk reward is definitely the way to go for now.

Now let's talk about this market. Do not mistake a strong pullback for the end of the bull market. Once this pulls down hard most will think the bull market has come to an end. It is not going to be over. Earnings are powerful for sure, and ultimately, that's what moves a market. If earnings are strong people will want in, and if the current trend continues, as it is likely to thanks to Ben, then the bull market should hold very well over the rest of the year.

Look at the selling as an opportunity to get very long. It won't be easy knowing when to go back in hard, but the market oscillators will lend a hand in that arena. The market will bring about some fear in the near future, and that's what it will need. We've had a 30-plus spread on the bull bear ratio for weeks, if not longer. Retail is rocking in and buying all dips. The put-call buying is exploding on the up side. These are all hints that sooner than later we'll have to see a strong selling episode. Welcome it.

When looking at today's market it is very interesting. We saw some major sell off from the recent leaders, especially those in technology and the commodity world. Apple Inc. (AAPL), Mosaic Co. (MOS) , Potash Corp. of Saskatchewan, Inc. (POT), Agrium Inc. (AGU), and Walter Energy Inc. (WLT), to name just a very few of them. All of them put in topping candles for the near-term, yet, these leaders didn't take the overall market lower, which is really bullish behavior. Classic bull market behavior for sure. Rotation! This is the very reason why I tell you to never short a bull market. Stocks can pull back very hard, yet, not affect the overall market.

Normally, when leaders, such as these, pull back and put in topping candles, you'd expect the whole market to come racing down with them. But that's just not happening right now. This is also what makes calling the top of the move so difficult. The market has yet to show that it's going to come down hard and correct, although, as I said, that could happen at any moment. It's also why you have to have at least a drop of exposure, even at extremes of overbought such as we have. Stay with the trend, and use corrections to buy, rather than trying to time a shorting period.

Support is all over the place for this market, and the reason why It will be very tough for the bears going forward with respect to getting too much down side action, before we reverse back up as things unwind. There are gaps galore and critical exponential moving averages so close together. When one is taken out, then immediately there's another one to deal with.

You don't get a lot of "thin air" moving lower. Just too many levels of support in a small area. For the Nasdaq, we have first support at 2812, which is gap support. Below that we have support at 2800 down to 2780 where there is the 20-day exponential moving average. For the S&P 500, we have gap support at 1329. Below that is the 20-day exponential moving average at 1316. Just one percent below that first gap support. On and on we go with support after support close together.

In closing, the daily index chart RSI's are in the low to upper 70's. The weekly index charts are in the mid to upper 70's. 79 on the Dow. This means there is extreme risk short-term for a powerful reversal lower to correct this intense level of overbought. Stochastic's 99.5. Can't last, but again, you can't accurately predict the moment this caves in. Keeping some long exposure is what you do, but don't go overboard.

Give yourself a break and have a great 3-day weekend.

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 constitutinginvestment advice. Trades mentioned on the site are hypothetical, not actual, positions.

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