It’s time for an overbought pullback on the S&P 500. Seasonal influences suggest that the markets should pull back a bit after the US Thanksgiving weekend, and pick back up again into December. Traditional momentum indicators such as RSI and stochastics are overbought – as well as some of the less traditional momentum readings like the level of the new high/new low ratio. Note that this indicator is above my “high” line – an overbought signal.
Meanwhile, the NYSE composite average of all listed stocks shows no new highs – diverging from the new highs on the more concentrated S&P 500 and DJIA indices. This suggests unfavorable breadth – i.e. a more concentrated market. I discussed this tendency towards a concentrated number of rising sectors rising after the recent election here.
My short termed S&P 500 timing system, which I have referred to in many past blogs, is nearing a sell point. All three conditions are on the verge of signalling a short termed sell signal. RSI and stochastics are firmly overbought and Bollinger Bands show the market riding the high band. However, a sell signal will become official only when all three loop down – which will occur upon 1 or two down days on the market – should that likely event occur.
The conditions are ripe for some profit taking on the market. This trading system is a short termed system – it is not projecting a prolonged selloff. Use a selloff, assuming there is one, as a buying opportunity. Near-termed support lies between 2050 and 2080 on this index. At or near that zone might provide the opportunity to enter the market with any cash you’ve been holding in reserve.