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Seasonality Versus Overbought.....

Jack Steiman from SwingTradeOnline.com at 12/29/09


This is normally a very strong time of the year for the retail buying crowd. The market drifts higher even if the conditions aren't exactly perfect. This is what we currently have going on. The daily charts and the 60-minute charts are overbought. Intra day they were really at extremes of overbought, especially the 60-minute short-term time framers. RSI readings at 70 or higher with stochastics 90 or higher normally equates to a rather sizeable pullback. The market pulled back off its highs for sure but it wasn't exactly a rousing sell off. It could surely use more selling to unwind the oscillators further but expecting too much this time of year may be asking a bit too much. We may have to wait for the new year before we see any real selling. It could happen now of course but I wouldn't expect anything too rousing to the down side. The retail, with its expectations of upside action in late December, will likely be buying any and all weakness.

We gapped up ever so slightly today making new highs across the board before we finally saw things settle down. Stocks on the highest of poles were leading up yet again but they finally reached the breaking point where the rubber band could stretch no further. After topping out late morning, the market spent the rest of the day slowly but surely moving lower. Nowhere near anything resembling important support but falling back some to get closer to those wedge breakout areas.

See today's charts at SwingTradeOnline: INDU (Dow Industrial Average Daily), COMPQ (Nasdaq Composite Daily), SPX (S&P500 Large Cap Weekly), MID (S&P 400 Mid Cap), DJUSCH (Dow US Chemicals).

The financials were the first to fall as usual which led the market down. They didn't get the most overbought but they wasted little time leading lower. This sector continues to find the most headwinds. So many loans still on those books and the lack of lending is making many wonder where the next strong profit maker is going to come from. They aren't lending because they're afraid. Simple as that. Not very sophisticated answer I know but that is the bottom line. They are truly afraid of putting on more bad loans, even though the way they're looking at giving out loans has changed dramatically and in many ways protect them. The financial system seems to be such that they fear the economy is going to worsen further. That means they feel those that are good risks now won't be down the road. A scared group of banks means the market is not yet ready to reward them with a move back through those lost 50-day exponential moving averages. All of the good stocks we identify with in the financial sector are trading below those 50's and that means the waters still aren't very safe there.

Based on how the daily charts look right now, you could say they're healthy and you'd be right but you also have to accept the fact that they're overbought and thus expecting a launch higher here in the market is not reasonable thinking. I am not saying we're about to collapse. I am saying upside will be a bit tougher short term but we can still manage to drift about. When individual stocks set up you can buy them. Use the 60-minute charts for entry. I will be searching daily until things unwind appropriately. I still wouldn't short this market due to the confirmed buy signal in place overall. We may not go anywhere significant for a spell but I still would not short here. Use weakness in the right plays to buy.

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