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MARKET DIRECTION CALLS
August 2 2011 - Selling Intensifies
August 1 2011 - Bear Returns
July 28 2011 - Before The Open
July 27 2011 - Down But Are We Out?
July 20 2011 - Stock Market Volatility
July 18 2011 - Investors' Nervousness
July 15 2011 - Earnings VS Bleak Data
July 14 2011 - Below 1310
July 13 2011 - Ugly Looking Chart
July 12 2011 - Razor's Edge
July 8 2011 - Nasdaq Leads The Way
July 5 2011 - Expected Weakness
July 1 2011 - Overbought
Jun 28 2011 - July Rally?
Jun 27 2011 - Mixed Signals 
Jun 21 2011 - Bottom Or Bounce?
Jun 16 2011 - Raising Cash
Jun 15 2011 - More Downside To Come?
Jun 14 2011 - Bounce or Bottom?
Jun 12 2011 - Batten Down The Hatches
Jun 6 2011 - Bounce Sometime Soon?
Jun 2 2011 - Sell Signals and Warnings Everywhere
Jun 1 2011 - How Bad Could The Selling Get
Jun 1 2011 - Tread Carefully - Markets Remains Overvalued
May 31 2011 - Success - 100 Day Moving Average Tested
May 17 2011 - Be Careful Out There
Apri 18 2011 - Two Bears Compared
Apr 13 2011 - Why I Bought Puts Today
Apr 4 2011 - Breaking The February Highs
Mar 16 2011 - The Art Of Being Wrong
Mar 15 2011 - Market Remains Resilient
Mar 11 2011 - Trend Is Down
Feb 25 2011 - Trend Turning Bearish
Feb 11 2011 - Still Up - But Watch For June
Jan 3 2011 - Trend Remains Positive
 

MARKET DIRECTION CALL S&P 500

July 1 2011 - Overbought

I pulled this chart at 3:10 PM on July 1. Happy Canada Day for my fellow Canadians and Happy Independence Day for my American friends! This has been the best week since September 2010. The indicators show the market has pushed back above the 100 and 50 day EMA. The market is nearing the top before the S&P fell on May 31. All the indicators are now showing an overbought market. The volume though has almost doubled from the first few up days when the market turned. This is a great sign. The Ultimate Oscillator is showing too much exuberance on the part of investors, with a very bullish 82.12. Even though the market is overbought, I think the odds are pretty good we can break through the May 30-31 high. I do believe though we could go sideways for a while and retrace some of the latest upturn before challenging the April High.

The fact that the market is flashing overbought does not necessarily mean a pullback right away. The market can move higher and an overbought condition can last longer than analysts think. The last overbought condition lasted 5 sessions. (I have marked it on the chart below)

The Slow Stochastic is also flashing overbought BUT NOT A BEAR FLAG and MACD is also warning of the same condition, with a bullish reading of 7.87. The technicals point to terrific exuberance on the part of investors. In this upturn it is a variety of stocks that are making big gains but not the large defensives because they did not fall far enough. Microsoft for example and Intel have had great moves as they recover lost ground but stocks like Johnson and Johnson and Clorox didn't fall very far so they have less territory to reclaims. I believe for some of these big defensive stocks to make new 52 week highs, they are going to have to show increased earnings, otherwise any move higher is suspect, in my book.

S&P500 chart for July 1 2011

Below is the VIX chart. It is down another 6% today and look at where it has ended up. We are back to levels that have held for the past 6 months. A definite sign that investors are unconcerned now that the Greek Debt Crisis has been kicked down the road.

VIX Chart - July 11 2011

Last chart, below is the XLF Financial Index. While still in its own bear market, the XLF reflects the same attitude from investors. It is rising. It has a very long way to go to get out of its bear market. But staying above 15.00 is a good sign for the short term anyway. Should it fall back below 15.00 I will be starting again to raise cash.

XLF chart - July 1 2011

SUMMARY

I believe the July rally is well underway. How high it can go I can only guess, but I do believe the oversold condition will hold the market back a bit, or even see a retrenchment which for short term dip buyers will be another opportunity. Since so many will be watching for a pullback, it may not occur. I do not see any indication of a severe correction in July, beyond what June provided. Who knows, perhaps the rally will continue into August. If it does wouldn't it be great to revisit the Feb highs this summer rather than in the fall. Wouldn't that shock a lot of the analysts who predicted a crash coming in June and announced that the bull market was over? I am back selling puts and covered calls but I am still staying at the strike levels I have determined are fair value for the stocks I am in. I am not interested in being assigned at valuations that I believe are too high.

 

 

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