Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
The resilience of the market to the upside remains quite remarkable. Despite poor breadth yesterday and abysmal volume, they were able to push the index up to near unchanged late in the day despite morning weakness. We have an obvious gap up on Friday’s job data to fill – it looked like it would happen in short order yesterday morning but to no avail. While it is obvious this market could use some form of rest, it appears it’s going to happen when as many people as possible have been lulled into a trance of buying every dip. At this time we’re seeing a stair step up rally on the S&P 500 and sit at resistance levels at or near the highs of 2011.
Aside from that quick head fake a week ago Monday and Tuesday, the major indexes have not even breached their 10 day moving averages. A quick glance of the 20 day moving average a week ago Monday led to a orderly bounce – this shows a high level of strength. While a host of secondary indicators are at extreme overbought levels, that has been the case on and off for weeks. It will eventually matter but when is a good question. In the near term, filling that gap from Friday and/or returning to touch the 10 day moving average would be potential downside targets. But one would assume dip buyers, in Pavlovian fashion, will be waiting there. For a sustained move downward we’d need to see a breach of the 20 day moving average at minimum, which is down at 1312.00; that sort of action would be the first change in character in the market during 2012. That is roughly 2.2% lower from here – but until we see this actually happen, one has to ‘go with the flow’.
If the market simply goes down to that 10 day moving average (roughly 1325) and/or meanders sideways over the next 3-5 sessions, it remains in ‘teflon’ mode and poised for an attack on those highs of 2011.
As for the NASDAQ it’s essentially the same condition, although that index has already breached last summer’s highs, and is even more overbought than the S&P 500.
All in all, we are in a game of chicken here…
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