Markets Looking Overbought

05/12/03 08:11:18 AM

by Matt Blackman

Across the board, indexes have moved up handily since March 10, much of it fueled by war relief. Where they go from here will be a good indicator of underlying market strength.

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Since March 10, the Dow has moved up nearly 16% and the S&P 500 is up more than 12%. Both have hardly taken a breath. The question in the minds of both bulls and bears is, what will happen when they finally do?

Figure 1 - Weekly DJIA showing long-term trendline and the stochastic RSI looking overbought. The last time the indicator was this overbought was back in December 2002 after which the index lost 1500 points before rebounding.

Figure 2 � Weekly S&P500 index showing similar long-term trendline and stochastic RSI firmly in overbought territory. Note the bearish rising wedge pattern that has formed on falling volume. The solid dark red line is the long-term head & shoulders top (HST) neckline that will provide significant overhead resistance to a continued rise in prices.

Graphic provided by: MetaStock.

Figure 3 - The Standard & Poor's Deposits/Receipts (SPY) is a good North American market proxy. Note a similar rising wedge pattern to the S&P 500 and overbought stochastic RSI indicator and HST neckline.

If the market takes a breather without establishing lower lows, it will bode well for a sustained upward move. This will mean staying above 7420 for the Dow and above 790 for the S&P500. The less the downside move during this upcoming rest phase, the more bullish it will be.

The bad news is that if the breather comes before the indexes are able to set higher highs (above 955 for the S&P and 9044 for the Dow), it will mean more lower highs which would be bearish from a weekly perspective. From where I sit, it looks like we still have a way to go before we are out of the bear-infested woods.

No matter what your outlook for the long term, it is high time that the market took a breather and a good time to take some profits off the table for those who have been enjoying the equity elevator ride in the last six weeks.

Matt Blackman

Matt Blackman is a full-time technical and financial writer and trader. He produces corporate and financial newsletters, and assists clients in getting published in the mainstream media. He is the host of TradeSystemGuru.com. Matt has earned the Chartered Market Technician (CMT) designation. Find out what stocks and futures Matt is watching on Twitter at www.twitter.com/RatioTrade

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