Short-Term Overbought – The Decline Begins Now

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The rally has been furious and fast. In less than four weeks, the Dow has risen 14.8 percent from its 2011 low, reached on Oct. 3. The S&P has gained 17 percent. The rally has been historic. If tomorrow holds 3% on the S&P, the major market benchmark will set the performance record for a one-month time frame.


While I mentioned that the market was short-term oversold towards the beginning of the month I never thought the market would rally this far, this fast. The S&P pushed through 1200, then 1220, followed by 1250 and now it sits at 1285. Amazing!


But, now we are at a very important area of strong overhead resistance at 1300. My guess is that we will take a breather for the next 5-10 days and pullback to possibly the 1220 area before the end of the year "Santa Claus" rally begin to take shape.


Once the New Year passes, well, I think we could see more doldrums, but that is way too far out for me to discuss right now.


All of the major benchmarks and most of the sector ETFs I follow have pushed into a short-term "overbought" to "very overbought" state, so I expect to see a short-term pullback as we head into next week. However, the one piece that could hold this market up over the next few days is the overwhelmingly strong seasonal bullishness that resides during the end of October/beginning of September. Once the seasonality passes it is back to a tug of war scenario with 1250 on the S&P being the first area the bulls need to defend.


But for now let the bulls rejoice. But know, that the risk/reward is now pointing towards the downside.  


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High-Probability, Mean-Reversion Indicator