Jack's Wrap - It Just Won't Quit...

Wednesday February 22nd 2012
It Just Won't Quit...
by Jack Steiman www.SwingTradeOnline.com

This is certainly a market that keeps ignoring overbought. It unwinds some of its overbought oscillators, with small moves lower. The RSI's get just below 70, especially on the Nasdaq and S&P 500, and then it runs back up once again. That’s true bullish behavior in an up-trending environment. The bears try very hard to sell things down, but with the strong action overall of late, the market has established many good support levels through horizontal price, gaps, exponential and simple moving averages. Trend lines can be thrown in there as well. There's just a lot of areas for support, so even if the bears get through one of them, there's another waiting not too far below.

They are really bunching up. This is why the bulls are being so persistent in keeping this market up. They know there's a plethora of solid support, all with fee percentage points. The bulls are simply a bit braver than they've been in quite some time, so the market keeps holding a bid, even if it sells some to unwind. The selling has yet to get out of hand. Some selling is definitely a positive, and the bulls are doing their best to keep the selling at some and not at a lot. The bulls remain in clear control, even though we keep hearing that a powerful selling episode is very close at hand. Sometimes overbought gets worked off in time, and not so much in price, thus, the reason for the markets solid overall behavior. The bulls won't give up their shares very easily.

One of the major worries that was upon us coming into this week was sentiment. The bull-bear spread had begun to pick up steam to the nearly too many bulls side of the ledger. We have watched the bull-bear spread go from plus 21% to plus 29% in just two weeks, so it seemed a slam dunk that today we'd see the number climb over 30%. I certainly expected that to occur. What we got was something totally unexpected as the spread went from 29% down to 24.5%. A happy one for the bulls drop of 4.5%. Complacency is not the worry, for now it seemed destined to be. That's because many are expecting a bigger pullback, is my guess, and thus, got more bearish. So far it hasn't taken place, and if the masses keep thinking it will happen, maybe the numbers can drop a bit more. If we do get some deeper selling, then it may be more than that. Maybe back below, or near, 20% again, which would be nirvana for the bulls. 24.5% is good enough for now.

The market can correct in many ways. One of the best ways for this to occur is through sector rotation. You get overbought on one sector chart, and that one starts to unwind and pull back. As that's happening, you get other sector charts that have already unwound, and then they start to head back up. A push-pull scenario, which allows the market to handle out, but at the same time, unwind overbought daily index charts, such as the S&P 500. In a more nasty pullback scenario, you get the entire market just giving it up, which creates a very poor advance-decline line, because all the sectors go down together. That has simply not been the case with this bull scenario. It has been one up, and another down, almost day by day. Lots of sectors up, and lots down, all in the same day, is a more bullish way to keep the market up, while somewhat unwinding overbought daily momentum oscillators. This shows the overall good health of the stock market at this moment.

There is very strong support between the 20-day exponential moving average currently at 1340, and the long-term down-trend line now at 1315, and falling slowly, which is a good thing for the bulls. In between, there are gaps, and many other types of support, thus, that two percent range will be very tough for the bears to break down through. Very tough resistance is at 1370, and then 1400/1410. It would be best if the market continues to slowly, or even a little more rapidly, unwind those momentum oscillators. While they're no longer officially overbought, some distance below RSI's at 70 would be a good thing. If the market wants to do that task through time, instead of too much price, so be it. A longer handle would be best. We'll let the market tell us what it wants to do, and we'll simply respect the message. Keeping some exposure is appropriate, but not a full port worth due to the risk at overbought.



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