I posted on Thursday that “the markets have entered overbought territory and that it’s time to be very cautious until we see how this shakes out.” I still hold that this is the case. This current state of overboughtness can resolve in two ways: through time with a consolidation period or through price destruction. Since market breadth indicators are close to but not at extreme overbought levels, then as of Friday’s close there are two possibilities for market direction next week.
First, we could see the markets enter a consolidation period which would allow breadth indicators to recycle lower and work off their current overbought state. Second we could see the markets rally hard early in the week (AAPL releases earnings after the bell Tuesday) and push breadth indicators to extreme overbought levels at which time one would expect the market to pull back to one degree or another.
In the meantime, markets are moving higher above rising trend lines and rising MA’s. The Q’s just made a new rally closing high on Thursday exceeding the previous closing high of 59.34 from July 26th. But one must always consider the other side of the coin, the Yin and the Yang, the double edged sword, the dangerous opportunity.
For the Bulls:
$NYSI has climbed to the 800 level and remains above my preferred MA’s. The daily gains over the past few days have been in the 50 digit range which reflects market strength but not over exuberance. Daily readings of 70 or more indicate too much exuberance and usually come prior to market turning points, so watch this chart for such a reading next week or anytime, for that matter.
$NYDNV dropped to 113 on Wednesday, which is an extreme oversold reading, but has since backed off.
$NYMO with Bollinger Bands pushed to within 11 ticks of the upper BB on Thursday, but has since backed off a little and is now 14 ticks below the upper BB. $NYMO doesn’t always have to tag the upper BB to signal extreme overboughtness, but it’s always better the closer it gets.
P/C Ratio, after hitting its lowest level in months, rose to .80 on Friday, which would be a neutral reading. A convincing rally early next week could push the P/C Ratio back into the low .70′s or maybe into the .60′s.
4wk New High/Low Ratio, after rising into overbought territory on Thursday, backed off to 89.26 on Friday.
For the Bears:
$NYSI weekly using 5,3,3 stochastics is showing that the stochastic has pushed up to extreme overbought levels. But note on the chart that in the past when this has occurred, $NYSI in the weekly time frame can rise for one to two more weeks before reversing.
$BPSPX has pushed to 78.40. While this indicates an overbought reading, $BPSPX can easily go higher, but the higher it goes the more likely you will see a deeper pull back.
$BPTRAN has now pushed to 90. $BPTRAN can go higher but really shouldn’t go above 95. Regardless, $BPTRAN is in overbought territory and if it should go higher then you would expect a deeper pull back.
$SPXA50R at 86.20 is in overbought territory. It can go higher but, again, the higher it goes from here the more likely we will see a deeper pull back.
Zweig Breadth Thrust dropped slightly on Friday to 61.04, but this is clearly in overbought territory. ZBT is one of my favorite indicators and when it gets above 60 I get very concerned.
$VIX has dropped to 18.28 and in so doing has pushed the RSI in the 60min time frame to 25 and the RSI in the daily time frame to 33. $VIX in the 60min, based on the low RSI reading, is clearly oversold. $VIX will usually bounce when the RSI in the 60min time frame drops below 30 and this, of course, means that $SPX will roll over. The question remains when will the $VIX bounce and just how long will the bounce last. Ultimately I believe $VIX will drop to and below 15 before it bottoms, as has been the case so many times in the past, but until then there’s nothing that says $VIX can’t rally for several days at any given time.
$USHL rolled over on Friday in an instance of negative divergence, which has been ominous for the markets almost immediately following such an event.
Chaikin Money Flow for the Q’s, SPY, IWM, & DIA is at levels not seen since the May and late October highs and other turning points for these key ETF’s.
The above represent most of the indicators that I follow and you can see there is a clear divide amongst them. We are not at but are approaching critical levels in market breadth indicators. If the market were to enter a consolidation phase in the coming week, then that would be good for the markets going forward, but, if on the other hand, the markets do not back off but continue strongly higher for the next week or two, then you should be prepared for a deeper retrace.
Weekly chart of $SPX and it looks good. While the 26MA continues to fall, the 13MA is about two weeks away from a Bullish X of the 52MA. Until proven otherwise, the benefit of the doubt remains with the Bulls.
$SOX index was up 8.05% this past week and the RSI on the daily chart has pushed to 72.68. This index should be watched for any signs of weakness in the week or weeks ahead as weakness in the $SOX will bleed over into the $COMPQ, $NDX, & $RUT.
GL in the week ahead.