Monday, May 2, 2011

Overbought Soon....

With the market back to its old ways, creating light volume "V" shaped moves up and Monday morning gap ups, we have to go back to the playbook used the past few years.  With the market up (including today) 8 of 9 sessions - and the only down session a tiny pullback - the market will soon be overbought.  If this non stop rally continues until mid week, we'll be poised for at least a stall if not a pullback.  During the rally from August 2010 forward the 10 and/or 13 day moving averages have been excellent levels of support on the pullbacks and the places to buy.  Conversely, we are quite extended from say the 13 day moving average (+1.7%), and this does not even account for the gap up we shall experience this morning.  Some other secondary indicators such as RSI and MACD should also be reading as quite overbought by say Wednesday of this week, barring a negative move in the indexes Tuesday.

That said, we had a 2 month consolidation period from which the S&P 500 just broke out of, so dips are to be bought until the market proves otherwise - most of the rallies we've experienced have been 6-10 week affairs that only are interrupted by geopolitical affairs.  We're only 2 weeks into this one.  The only wildcard here is the very oversold U.S. dollar which seems like it *has* to have a dead cat bounce sometime soon.  The market has been immensely inversely correlated to dollar weakness, so it will be interesting to see what happens when the dollar finally has a cursory bounce of any meaning.

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