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Just to reinforce...

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Over the past few columns I have tried to amplify a couple of thoughts on the current environment:

The vast majority of the gains are behind us, but that doesn't make the market a short...yet. At last week's peak, the SPX and DJIA were up 20% and the NASDAQ was up over 30% from the early October lows. In any environment those are rather significant gains· The very near-term correction has run its course, very similar in reason, timing and percentage pullback as last year's early December correction.

A retest of last weeks high should ensue, but even if there is a marginal new high, the gains should be limited and any further rally should be used as an opportunity to lighten positions for those that bought for a trade or have an uncomfortably high position in equities.
· The market is past the "perception trade" and is before the "reality trade," which basically means a lot of sideways action before further economic and corporate profit evidence is seen.

From a technical perspective, the intermediate-term (weekly) technical picture is likely to lose momentum no matter what the tape does very near-term. In early October, one of the main reasons that I thought there was a limited amount of risk and very good reward was the extension below the 200-day moving average and level of oversold readings on the individual charts and the major market indices. On both fronts, the level below the 200-day moving average and the oversold readings on weekly charts indicated that a turn was very close at hand.

Now that there has been this dramatic seven week rally, the market (as defined by the S&P 500) is no longer extended below its long-term moving average, remains in a downtrend and has now reached overbought readings on the weekly picture. That makes any sizeable gains from current levels rather unlikely.

Again, it is important to understand that just because the market stops going up, doesn't mean it has to tank right away. Lets use the weekly picture of the NASDAQ Composite Index (NAZ). The NAZ hit maximum overbought on the weekly charts last year on December 7th, but didn't begin moving lower until after the turn of the year, so there was plenty of time to sell and take advantage of the strength.

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