Extended Is As Extended Does

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While the markets are extended on a short term basis the technical condition of the market remains in outstanding shape. 84% of the stocks in the S&P 500 are in either basing or advancing patterns. 82% of stocks in secondary markets are in good shape technically. With the market in such sound shape technically pullbacks will remained controlled and orderly.

The major averages sold off briefly last week. The averages were bought aggressively as near term support levels came into play. When short term support was tested the markets rebounded sharply. This is the sort of action you see in strong markets. Even with the market extended we can consolidate these gains and still go higher. What is the probability of that?

As we look at the underlying technical picture of the market things get stronger. The NYUA, an unweighted average of stocks, hit a new all-time high in trading in Friday. This takes out the impact of the largest names in the market. The strength of this reading tells me, as we currently stand, the major selloff many are waiting for is not just around the corner.

Why is it I say many are waiting for a selloff? The large block ratio, a measure of what the major institutional players are doing, is actually oversold. That tells me that many major investors saw weakness early last week and reduced exposure to the equity markets just to watch the market move higher to end the week. Also, the call/put ratio has not reached elevated levels. Call (bullish) buyers have not stormed into the market as often happens just prior to a selloff.

What will give us some insight into the next move in the markets? Let’s look at the support and resistance levels for the major averages. A sign that we could see our first extended move lower in the market is if the averages close below these levels for the S&P 500, Dow, NASDAQ and Russell 2000: 1495/13,850/3130/893. If the following resistance levels are surpassed then the market will gain even more strength: 1520/14,025/3200/915.

"The market has come too far too fast." "The market is a good value here." Statements like that are thrown about on TV all day long. They really don’t mean all that much. Hopefully, you can use the support and resistance levels I give you in your attempts to navigate theses tricky markets. As for the glittering generalities you hear on TV, for the most part they are nonsense and are used to rationalize a recent poor call.

A message from a “wise sage” was forwarded to me today. He didn’t realize it but his defense to recent criticism of his “market calls” relied on the broken clock is right two times a day defense. He was criticized for predicting a huge decline just ahead of a multi-year advance in the market. He said the market would fall substantially prior to a four year bull run in stocks. His defense now is that he was right, he was just six years early, as the market fell in 2008 and 2009. I bring this up because there are a ton of people out there that will try to convince you of how insightful they are. You can share some of those insights if you pay to subscribe to their services. I say consider the source and just ask if their position makes any sense.

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About Thomas J Smith CFA