Home > Equities & Indices, Short-Term Trader > Stocks Overbought, November 3rd Is Looming

Stocks Overbought, November 3rd Is Looming

October 25, 2010 Leave a comment Go to comments

Last week, I went over a few indicators pointing to a pullback in equities from a sentiment standpoint, but as I mentioned – an extreme in sentiment isn't in of itself a reason to buy or sell. A fundamental catalyst and/or the technical picture needs to confirm conclusions drawn from sentiment data. We may get both within the next two weeks.

This morning, the S&P 500 touched the 200 week SMA for the first time since June of 2008, however, it came close back in April – that turned out to be the sweet spot for sellers. The current set-up doesn't create a bearish case as compelling as the one in April, but when taking the 200 week into consideration with the level of bullishness and long-term technical support in the equity market's inverse ETF, the U.S. Dollar, it becomes quite evident that the risk for long positions is growing with each passing day. Also, the menacing posture of financial stocks, as evidenced by the SPDR ETF – XLF, provides further reason for concern.

      SPX touches 200 week SMA              Dollar Index (DXY) LT T-Line, Pessimism

Spx weekly          DOLLAR INDEX

On November 3rd, expectation, as everyone knows, is that the Fed could announce plans for more QE, and as such stocks look like they want to continue churning until then. This is beginning to look more and more like a classic buy the rumor, sell the news trade.

However, there does exist a bearish set-up, which if triggered could bring weakness to markets in the days to come. I am referring to a rising wedge on the 60 minute/multi-day chart, which sans the before mentioned FOMC meeting, I would feel more confident about.  But, since the market has been "geeked up" for several weeks now in anticipation of a move by the Fed, I am viewing this set-up with a cautious eye. The market is very close to triggering the underside trend-line of the wedge, and if it does the near term target is 1155-1160.

ES Futures – Multi-day Rising Wedge

Es rising wedge

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