Checking the Indices
Well that weekend was a real weather washout in the Northeast. Oh well. We could focus on the negative side of the poor weather or we could realize that when a nice weekend comes, we'll enjoy it that much more. The same could be said for the various major market indices: They have been in consolidation mode for the last couple of weeks after a huge rally in a short period of time.
A number of people are suggesting a new bull market has begun (either cyclical or secular) and that any pullback should be bought. My view is that in primary uptrends, overbought becomes more overbought, whereas the opposite holds true in downtrends. The three most closely tracked market indices (the S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite) have worked off their overbought condition and have move closer to oversold territory.
The only problem I have with the "new bull" scenario is that the S&P 500 and Dow remain in a precarious intermediate-term situation. Both are into trendline and/or trading range resistance, while offering a negative indication from extreme overbought territory. The only time this condition isn't a big negative is when a new bull market is emerging. The most recent example of this is 1998. Intermediate-term (weekly) overbought was met with more buying after a brief pullback. If that's going to be the case this time, we should know in rather short order. There should be clear signs over the next couple of weeks and until then a defensive posture seems to make sense.
The S&P 500
This broad market measure is doing a good job of working off the overbought condition, but more work probably needs to be done. The best-case scenario would be a pullback to price and long-term moving average support between 890-900. The problem here is that the intermediate-term picture isn't as pretty --- barring a breakout above trendline and trading range resistance.
Dow Jones Industrial Average
The DJIA has the same near-term situation as the SPX. The difference is that the intermediate-term picture shows a market that still has the looks of a top vs. a bottom, because the index has held up better during the bear market.
The near-term here looks a little more vulnerable due to the still extended nature of prices, especially relative to the long-term moving average (200-day). On the intermediate-term, the picture looks a little better because trendline and price resistance has been breached, suggesting some level of leadership. Like the other indices, the key will be whether the intermediate-term overbought condition can be worked off by more sideways action vs. a big drop.
Source on all charts: Baseline
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