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Jack's Wrap - Another Week At Overbought...Bullish Action Continues On....

Friday February 17th 2012
Another Week At Overbought...Bullish Action Continues On....
by Jack Steiman www.SwingTradeOnline.com

What other way is there to say it, the bulls are not letting go of their shares very easily. They think things are improving in the world, especially here at home, and thus, they want no part of letting their shares go. The news has been improving on all fronts from jobless claims to manufacturing. Earnings overall have also been quite decent. Some bad blowups, for sure, but the overall picture shows an economy that's not falling apart. Most companies with large exposure in Europe are telling us that things aren't so bad there either. Quietly things are on the mend, although some of it is due to the money machine. For now, the market is liking what it sees. Never argue with the markets message. You'll lose every time.

The day started off with a small gap up on the Dow and S&P 500, but the Nasdaq gapped down slightly. The Nasdaq was also the most overbought with an RSI reading of 75. There have been lots of days at 70, or above, and so it lagged today, which makes sense. The selling wasn't hard, nor did it last very long. Even the Nasdaq finished decently off its lows while the Dow and S&P 500 were able to maintain small gains for the day. That's the mantra for this market. Small grinding up days into overbought daily index charts. With the market near 1370 resistance, the up days are tinier and tinier. That’s never the best sign, but for the week the market continued to move slowly higher in what is classic bull market action. Move up even when we're overbought for an extended period of time. The gains are small but the up trend continues on. Sentiment is becoming a problem, folks. That's what starts to take shape after you've been running higher for a while. Folks who have missed the moves up want to be in, and thus, they keep buying up all pullbacks.

Fewer and fewer people are on the sidelines. We are seeing that in the bull-bear spread, which by next week will likely be over the 30% level. Once you cross 30%, the red flag is up. Once you cross 355, you are in bigger trouble with a powerful pullback imminent. We went up 8% over the two weeks prior to this one. My guess is, you can add another 4% on top of that for this week. It's getting precariously close to having the rubber band snap, and when that happens, the selling is nasty, to be kind. I will take greater precautions when this phenomenon becomes a reality, if it becomes a reality. Never a guarantee it will, but we are headed in that direction. You need to rein it in once you see the market have fewer and fewer bears. That's upon us at this time, so the need for watching what you play is now on the increase. For now, we know things are getting more complacent so keep things appropriate with an eye towards the new reading to come out Wednesday morning.

When a market gets a bit complacent and overbought, even though you are in a bull market, you want to start going back to the old way of playing, which means to buy stocks that are not frothy. No real high P/E stocks for the short-term would be best. You want to own the best companies in great bases that have lower P/E's in order to protect yourself should a strong pullback ensue. The froth stocks will get hit the hardest. The ones that don't deserve their stock prices. I had no problem owning those for a while, but now you need to revert back to the safety game. So, please, adjust accordingly. The froth plays will be back in play once we can truly unwind the overbought, and complacent conditions currently upon us. Dow stocks are best, but also any low P/E stock in the stock market universe. This means a lot of dividend stocks as well.

Greece is on the docket this weekend, thus, expect to hear a lot of news stories coming out of Europe. Can Greece be saved, or will they have to simply go belly up, is what we all want to have finalized already. Enough of this story. If they need to go down, and if austerity can't do the job, move on and take the pain. That would be the catalyst to finally get this market to sink lower appreciably. There's no guarantee the news will be bad out of Europe so stay tuned. I wish, just like everyone wishes, that this story would just go away one way or the other. We know that 1370 is resistance, and we also know the 20-day exponential moving average at 1335 is first important support with the big support coming in at the current down-trend line sitting at 1315. The bears will work hard to remove that level in time, but won't find it an easy task, no matter how overbought we are. The bulls will defend it with vigor. So, we keep some exposure, but we don't overdo it as a strong pullback is close at hand. We'll watch for the right reversal stick that tells us it's here.



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