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Selling To Come...Things Still Bullish Overall...

Jack Steiman from SwingTradeOnline.com at 12/30/09


Tonight I want to over multiple time frame charts with all of you to show you why buying anything new on the long side here is not the best of ideas unless you can scalp plays within hours. Not easy for the majority of you to do I know. I will be discussing the 60-minute time frame charts along with those critical daily and even weekly charts to show you what has set up and why taking on new longs right now is dangerous at best. Let me be clear that I do NOT think this market is going to get killed. Not one bit. I think the selling to come will be a wonderful opportunity to make great money going long. I just want all of you to be ready for a tough market in terms of upside in the very near future.

When discussing the charts I will be using the Dow, S&P 500 and Nasdaq. These are the leaders and it's best to refer to the leaders when discussing future movement of the market. We can start out with the 60-minute time frame charts. First thing to recognize is how overbought we got on the last move higher on these indexes. When looking at overbought conditions that reach extremes you want to focus on the combination of stochastics and RSI. A brief discussion on what is overbought on these oscillators. On stochastics, anything over 90 is reaching extremes. On RSI, anything at 70 or above is extreme.

See today's charts at SwingTradeOnline: COMPQ (Nasdaq Composite Daily), COMPQ (Nasdaq Composite 5 Year Weekly), INDX (Nasdaq 100), S&P 500 Depository Receipts (SPY), PowerShares DB US Dollar Index Bullish (UUP), Oil Services HOLDRs (OIH).

Depository Receipts (SPY), PowerShares DB US Dollar Index Bullish (UUP), Oil Services HOLDRs (OIH)

On the 60-minute Nasdaq chart, we recently saw the RSI actually touch 90, a level of overbought hardly ever seen. On the Dow we touched 72 and on the S&P 500 we touched 80. Even the Dow touched over 70, the usual laggard of the three major indexes. 80 for the S&P 500 is unusual and 90 for anything is almost unheard of. Now, as we try to go back up, the RSI’s are near overbought but lagging to reach the previous highs meaning negative divergences will form. RSI's, as of today's close, on the major indexes are averaging 64. Getting close to 70 yet again. Stochastics on the most recent highs, while RSI's were all over 70, were in the mid to upper 90's. Simply unsustainable. When stochastics are near 100 and RSI's over 70, that's deadly. So with a few days left in this trading year, 1.5 days to be exact, the 60's are about to get overbought yet again. Not quite there yet but very close and again, they'll all print negative divergences on some of the oscillators a long with the MACD's being at highly elevated levels.

If what I told you about on the 60's wasn't bad enough, it gets much worse. Let's move on to the daily charts. Based on today's closing prices on the major index charts, here are the current readings on the stochastics/RSI combination. The Dow closed with readings of 61 on RSI but 95 on stochastics. The RSI I may try for is 70, but that won't be easy with stochastics already so high. The numbers are basically identical on the S&P 500 but when we move on to the Nasdaq, we see RSI’s already at 70 with stochastics at 97. Ouch!! No real upside with readings such as those. The Nasdaq is already at extremes of overbought on the daily charts with the Dow and S&P 500 close behind.

Lastly, let's focus on the weekly charts. They often can confirm what we see on the daily charts at extremes. Let's take a look inside the numbers. These numbers are not pretty for the bulls and are actually even more overbought than there daily charts, which isn't easy to do. The Dow has readings of 68 RSI, just under the 70 extreme and stochastics of 93. Not good if you like to be long. The S&P 500 has levels of 66/93 and get this, the Nasdaq is at 70/97, basically the same numbers it had on the daily chart. The weekly is confirming the extreme levels of overbought the daily's are displaying.

We're in retail week still. Normally the market holds up this week, regardless of how overbought things may be. Doesn't mean we will but it normally does. The reality is this. At some point in the near future, the market is going to have to sell off to unwind those very overbought daily and weekly oscillators. It has no choice. Now this is key and important to remember. WE ARE STILL ON A CLEAR BUY SIGNAL. Sounds strange to say but that's reality. What I am trying to relate to you is that the market will need to sell for sure but it is still quite likely to hold up overall.

Do not expect a collapse. Do expect selling. Some of it may seem scary. Doesn't mean you can't short either. However, you don't overdo it on the short side of the ledger. We're dramatically overbought and thus will need some time before it's safe to have multiple long plays going. However, I do think the time will come in the not distant future when we can buy harder again. Patience will pay off, but please adjust your bullish thinking accordingly for the near term, especially when we start the new year. We'll use the selling to accumulate great bases that set up from the selling.

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