I broke my own rule in not waiting for a 13/34 Bearish EMA X in the 60min time frame. I was so certain Wednesday evening, but Thursday’s reversal now places my call in question. Clearly the markets are overbought and a falling $NYSI indicates internal weakness. Transports continue to get pounded, being dragged down by the railroads, and FDX’s $2.00 loss on Friday isn’t helping this key sector. But the bottom line is that the market is trending up and the trend must be respected for as long as it lasts.
60min chart of SPY showing SPY trying to push back above the upper trend line and any kind of rally on Tuesday is likely to send SPY above that upper trend line.
Chart courtesy of FreeStockCharts.com
Daily chart of $SPX on which I’ve drawn in a new trend line. The ADX is now just below 40 and is already showing overbought.
Going back to the 2009 lows, the ADX has only climbed to or above 35 on three previous occasions: August 2009, April 2010, and January 2011.
ADX hit 40 during the week of August 10th, 2009 and the market dropped about 35pts in two sessions almost immediately. Just prior to this decline, RSI had pushed up close to 80.
ADX hit 35 in the second week of April, 2010 and the market dropped 30pts immediately. This was just a few weeks before the beginning of the 2010 decline. RSI was a contributing factor in that decline, as it rose to 80 signaling that the market was extremely overbought.
ADX hit 35 on about January 18th, 2011 and $SPX dropped about 15pts in the next session and would struggle for the rest of the month. On or about the 18th, the RSI rose to 80 once again showing an extremely overbought market.
Based on the above, ADX could peak at any time and begin to roll over while RSI may have already peaked.
$BPSPX has pushed to 84.60 and could very well be headed above 85, and then some. Zweig Breadth Thrust and 4wk New High/Low Ratio are both headed up but are currently in neutral territory so only a continued rally will push them back above overbought levels. $VIX fell hard last week and could easily drop below 15 in the week ahead, at which point it would be extremely oversold.
Despite the fact that the market is overbought and that breadth is showing weakness, the market is not so overbought that it just can’t go higher without a pause of one degree or another. However, a continued rally next week is likely to push the market further into overbought territory and that means the odds of pull back will increase, but from what level I have no idea. Trees don’t grow to the sky and markets don’t rally forever but until there are clear signs of distribution then this market is headed higher.
Next week, I begin the process of moving and I will stop posting on a daily basis. The moving process will take the rest of February and isn’t likely to be complete until the middle of March, if then. Once the move is complete, it isn’t likely that I will resume posting on a daily basis, though I may try to put something up on the weekends. Over the next couple of months, I hope to finish work on a few other “Pages” that detail the use and parameters of the indicators that I follow along with the various charts and methods that I use.
GL in the week ahead.