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SPX, RUT, NYMO Updates: Market Now Extremely Overbought


The charts suggest a turn lower is due; and the shape of the next decline should tell us whether the intermediate term outlook has changed or not.

MINYANVILLE ORIGINAL Odds are very high that this rally is about to take a breather. The shape of the next decline, and the price points that the next decline does (or does not) overlap, will tell us a great deal about whether or not the trend has changed to bullish at intermediate degree. Currently, the rally still fits within the outlook for a bearish intermediate trend quite well, and I do not as yet see a reason to shift outlooks. As always, though, the market is the final arbiter.

There are four signals suggesting that the rally is nearing a potential turning point. The first is the 1368 target, which was nearly reached on Monday. The second is that the McClellan Oscillator (NYMO) is now extremely overbought. The third is the structure of the rally counts as a complete, or nearly complete, wave form. And the fourth is the pending face-off versus the overhead resistance level of 1370.

Since the S&P 500 (SPX) has, as yet, done nothing to invalidate the outlook suggested by the apparent five-wave decline from the recent cycle high, the odds still favor a decline to new lows after this rally turns. And unless the market prints a new high north of 1422, the pending intermediate target in the 1100s is still active.

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I suspect we are extremely close to a turn. Below is the McClellan Oscillator (NYMO), which has reached levels that have preceded turns in the past.

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Next, a chart of the Russell 2000 (^RUT), which counts a bit differently than SPX. RUT's form highly suggests that the first wave up had an extended fifth wave. It is now approaching the level where wave c will be equal in length to wave a.

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Finally, a long-term weekly chart of the SPX, just to help everyone keep things in perspective.

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In conclusion, the odds heavily favor a turn lower, coming in the extremely near future -- likely as soon as the next session or two. If the bear case still holds water, it should be a significant turn -- but we'll watch the next decline carefully to see if the outlook has changed. And finally: Happy 4th of July! Trade (and drive!) safe.

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