time for a breather

wow, what a stellar day!  News from Europe (which I won't bore you with) caused great elation in the markets pushing them significantly higher.

The SP-500 finally gapped over and closed above the 200 day moving average, a very bullish signal, although I expect it to falter through this average a few times in the future, most institutional investors will use this as a sign to get long (versus short).  Does it mean trouble is over, not at all.  just a psychological wall we were able to get over. 

The Nasdaq did this on 10/12 as has been firmly over it ever since

The Russell 2000 still has a ways to go to get over its' 200 day, which I assume will provide some resistance.

I want to repeat my concern from yesterday ... we have come A LONG ways from the bottom VERY quickly and we are now grossly overbought which means we will have either a decline OR at least relatively flat consolidation for a few days.  The market can stay overbought for awhile, but after today ... it is at extreme levels. 

In fact, 45% of the market that I track (1500 of the largest companies) are above their upper bollinger band, which is 2 standard deviations above their 20 day average price.  Stocks usually only stay above (or below) their BB for a day or two and then fall back into it.  with almost half of the market there ... we won't stay this overbought for long.  In fact, the last time we were this overbought was on July 1, 2011 which was three days before we hit the top and fell hard from there.  I am certainly not predicting that we will have a similar decline, just want to emphasize that caution is in order.




The three indexes hit their top price of the day mid day and spent the afternoon falling a bit.  SPY formed a long legged doji which signals indecision in the market and 'can' signal a market top.

The Nasdaq formed what could be an Island Top formation (also called an evening star).  This candlestick figure starts with a strong gap up where the prices stays above the previous day (yesterday), then the following day (tomorrow) the prices gap down and continue down hard.  This is usually a climatic run in a stock and a very bearish signal.  FYI ... this occurred in Apple on 10/17/2011 and prices fell roughly 8% in a day.  Apple has recovered slightly from then, but still down.  Just to be clear, we do not have this signal as of yet ... it would only occur if we gapped down tomorrow and stayed down the entire day ... so tomorrow will tell us whether we will correct hard or just a minor one.

We still have A LOT of overhead resistance overhead on IWM and SPY that poses an issue as well.

I sound bearish, I know.  I'm actually not, in fact, we are in the strongest position we have been since the decline started in June ... but ... with all these yellow flags ... I feel caution is in order.  I actually sold half of my positions at the close today.  Might miss out on some gains, but I'd rather be cautious and buy back at a higher price if need be.

Tomorrow will be very telling for the short and intermediate direction of the market.