Market Continues To Grind Higher, But Two Consecutive Dojis Now In Place at Resistance...

By: Robert New & Jack Steiman | Fri, Sep 18, 2009
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Market Overview:

We are indeed in unusual times. It is extremely rare to have a market behave such as this one has over the past few weeks. Not the last six months really but the past several weeks. We have reached levels of overbought that basically bring the markets down in a pretty big way. That will happen of course at some point but it's amazing how long we are staying at such levels where it's hard to catch your breath. It's very thin air up here and of course that continues to spell red flag. I know you're tired of hearing it but my job is keep you on your toes and alert to what's normal behavior when certain conditions exist such as we have now. It's easy to get complacent and just throw caution to the wind. Why not just go all in and let this thing ride. Because you can get your head handed to you. It depends on your perspective. What your goals are. If your goal is to get really wealthy, then maybe taking that type of chance is what works best for you. I will never agree with that thinking but some would beg to differ. Now's the time to just let it ride and go for it. Again, not in my world. There is extreme danger out there that can hit at any moment. What most are now forgetting because things are so frothy is that when this does snap, you will be shocked by how hard the market gets hit. That may be days or many weeks away but when it occurs, look out. It may hit tomorrow. No one knows for sure. My guess is not quite yet but it's lurking and will hit when no one expects it. So what's the answer to this dilemma? Simple. Do what we've been doing. Make some money by keeping some scratch in the game and taking profits along the way. It has worked for us since the March lows which you all know we were fortunate enough to spot. Ride the escalator higher sure but recognize when it's time to be in but not if as were from the beginning when we were far more aggressive. That type of aggression is over until we get some unwinding of those grossly overbought daily charts. Adjust your formula as you move along. The formula was aggressive. The formula became to be decently in. The formula now is lightly now that we've moved most exposure back to cash to see how our important Resistance levels currently being tested get handled in the days ahead as you will see in the many charts below.

Last night we closed on a perfect doji or reversal candle from the trend in place. I talked about it in the news letter in detail. About how it was likely, in normal times, to gap down this morning and sell throughout the day in order to provide better buying opportunities in the days ahead. I asked the question of whether it would matter based on the froth that currently exists and right out of the gate today we got a resounding no it won't. The market gapped up a little bit, pulled back and then went up again before a final late selling program took away the highs but allowed the market to close higher for the day. Surprising for sure but then again, not. This market has been different for a while now and is acting much as 1999 did when we stayed overbought for many months at a time. Of course we know how badly that ended and why I'd love to see some selling just for the sake of releasing some froth. For now, the 1999 mirror is how we've been proceeding and you have to respect that for as long as it lasts.

Now we move on to something else. Some topic, different story. Doji's. We printed a second consecutive one today. Again, not to be taken lightly. Not to be ignored just because today's doji was ignored. Two consecutive doji's at major resistance should, again I say should, take this market down early next week. Will it? No way to really know is there. That's why we're only long two plays for now and are back to mostly cash near term. Not only did we print a second consecutive doji but did so at tremendous resistance. The 1060 SP 500 gap has been breached but we're still only in that gap and not through it by any means. With the top of the gap at 1080, you have to be extra careful here. In addition, we're showing hesitation on a number of fronts seen in charts 1-5 below. Not until we're cleanly through that 1080 SP 500 number can you say we've been successful at taking out this immense gap. Don't be fooled in to a sense of complacency just because we're in the gap. We could lose it in a heartbeat and trade well below it for a while. Remember please that it's a 2% gap down and that's huge for an index gap down. It occurred on massive volume if you study our first chart below. To just dismiss it without some cautionary actions makes no good sense at all. Please respect it. We are only long and have played that way overall and won't short here in to such an intense up trend but appropriateness says only minor exposure on the long side or cash near term to see how our key levels resolve. Yes, the trend is clearly up but there are reasons to suspect a pullback is here that will have a bullish effect in unwinding things on those daily charts.

Folks remember please that we're in the gap and to think about SP 1125 or thereabouts, we need to fully clear those beast of a gap which takes place when we clear 1080 and not a moment before. In the future, only when we lose 1018, massive gap as well, can we start to think that the upside is finally over for good. We remain very overbought with not the best of divergences out there although many of those have improved by the recent impulsive nature of the stochastic's on the index charts. Good to see that as this opens the door to the possibility of higher prices in the future. For now, in the gap, let's just keep doing what we're doing in case we get that massive reversal. Safety first while still making some decent coin.

Sentiment Analysis:

The real surprising aspect of this recent rally is that the bulls haven't ramped in terms of percentages. From last week to this week we saw a drop of 2% in overall bullishness in our Investors Intelligence Survey. A slight spike in new bears and a slight move down in bullishness. It went from 25% to 23%. You don't normally run in to headaches until we see a 40% separation from bulls to bears. When we look at the put call ratio we are not seeing too much complacency there at all. Mostly neutral readings from day to day. There are times when things get too complacent but as soon as we sell, things get pretty pessimistic rapidly. For the time being, and I have my eyes on this daily, the sentiment readings aren't such that there are any red flags at this moment in time. Thus while we may pullback off resistance near term to reset our overbought condition sentiment is not yet at levels that is suggestive of a major top.

Sector Watch:

Pretty strong week in most groups but some Sectors are now making critical Resistance Tests which somewhat mirrors our major Indices. We've included the SOX/Semiconductor Index seen in our 4th chart below. We are now in the process of testing the top of our Uptrend Channel off the March lows. In addition, need to keep watch on the Financials seen in our next chart which is showing some hesitation at the top of our Rising Diagonal Pattern with some Negative Divergence in place at our recent price high area. Oil as seen in our 6th chart below continues to trade in our recent $65-75 range. The OIH the Oil Services ETF made a nice move this week but stalled late at our $120 Gap area. There is a major "Thin Zone" above our $120 Gap so this is another important area to keep watch on next week. Other Groups that continue to perform well include the Retail Sector, the Aerospace Group which broke out, as well as selected Commodities with Gold finally making a close above the $1000 mark although still remains a crowded trade thanks to the fall in the US Dollar.

The Week Ahead:

The week ahead is quite simple. We have to watch the nature of this gap on the Sp 500 and see how our important Trendlines get handled on both the SP 500 and Nasdaq Daily charts. In light of RSI readings in excess of 70 some pullback would be no surprise. I would think that the bears would throw everything they have at it. They need to bring the market back below So 1060 to feel a sense of relief while the bulls will want to take out 1080 on the Sp. If that takes place, they know they'll have the bears on their knees, forced to cover which will add fuel to the rally. If we do fall, it'll be critical in how we do so. If it's more reflexive, or weak in nature, and we unwind those oscillators without too much price erosion, it tells us we'll be able to buy more aggressively again. An important technical week is here.



Robert New

Author: Robert New

Robert New

The Informed Trader is a site for self directed traders/investors. We offer Nightly Market Commentary, focused Long/Short Alerts, ETF/Sector Analysis, an Interactive Discussion Board with Intraday Stock/Market Analysis an IPO Corner and much more....

Copyright © 2009-2016 Robert New

Jack Steiman

Author: Jack Steiman

Jack Steiman

The Informed Trader is a site for self directed traders/investors. We offer Nightly Market Commentary, focused Long/Short Alerts, ETF/Sector Analysis, an Interactive Discussion Board with Intraday Stock/Market Analysis an IPO Corner and much more....

Copyright © 2009-2016 Jack Steiman

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