Authored by Lance Roberts via RealInvestmentAdvice.com,
Market Is Back To Very Overbought
As I noted last week:
“What happens in the middle of the week is of little consequence to us. We are only truly interested in where the week ends. In that regard, the bulls remained stuck at the ‘Maginot Line’ which continues to keep the majority of our models on hold for now.”
Despite a rough week for Facebook ($FB), which was an outcome which should have been a surprise to no one, the market did manage to clear the “Maginot Line” last week which brings January highs into focus.
In the intermediate-term, the market is moving back to rather extreme overbought conditions. The market can most assuredly get even more overbought from current levels, but does suggest that upside is becoming more limited from current levels. However, with the weekly “buy signal” triggered this past week, we must give the bulls some room to run.
With our portfolios nearly fully allocated, there is not a lot of actions we need to take currently as the markets continue to trend higher for now. We will continue to monitor our exposure and hedge risk accordingly, but with the weekly “buy signal” registered we are keeping our hedges limited and are widening our stops just a bit.
As noted above, a short-term correction is needed before adding further equity exposure to portfolios. That correction likely started on Friday and I will not be surprised to see it continue into next week. A retest of 2800 is likely at this point which would keep Pathway #1 intact. However, a violation of that level will likely trigger a short-term sell signal which could push the market back towards previous support at 2740.
There is a lot of support forming at 2740 which should be supportive of the market over the next couple of months. A violation of that level suggests something has likely broken and more protective actions should be taken. However, until that happens, we will give the markets the benefit of the doubt for now.
I have updated the current projected paths as we think they will play out over the next couple of weeks.
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Pathway #1: remains intact currently and a rally next week should push the markets to the January highs and the top of the current bullish trend channel from the April lows.
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Pathway #2a: a pullback next week that violates 2800, as stated above, will likely test the bottom of the bullish trend channel. This would likely be enough of a short-term correction to re-energize the bulls to make a run towards the January highs.
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Pathway #2b: A break of the bullish trend channel will quickly find a lot of support at 2740 as stated above. However, such a break will bring...