So far this short-term overbought condition that developed late last week has given us a whole lot of sideways chop -- just as most of the major indexes have reached some sort of resistance area.
The S&P 500 is at its previous high, and so is the Dow Jones industrial average; the Nasdaq is not far behind.
The Transports and Russell 2000 have both reached resistance areas, as well. But they are both still quite far from their all-time highs.
It should come as no surprise that the chart of the Russell 2000 looks similar to that of the Bank Index. Those are some big resistance areas on these charts.
I contend that the short-term overbought reading we encountered late last week should lead to a market pullback or digestion phase. That should be followed by another rally attempt. The reasoning behind this is that the intermediate-term indicators are not overbought, yet. In addition to that, breadth has been rising (and leading) and as long as that is the case, the market gets the benefit of the doubt to rally again.
In the near term, I think folks have gotten a bit bullish: The put/call ratio for exchange-traded funds has been under 100% for four-straight days. That's something we haven't seen since late November. That means the entire rally from January until April and the June and July rally did not see such enthusiasm using this particular indicator. But on a more intermediate-term basis, look at the 30-day moving average of the equity put/call ratio. It turned down in early September. It ought to make its way down toward the bottom of the page.
That the number of stocks making new highs on the New York Stock Exchange continues to contract is also a concern. Friday saw a mere 88 new highs.
But on an intermediate term-basis, the McClellan Summation Index is still rising, which is positive for stocks. And the 30-day moving average of the advance/decline line is not yet overbought. I consider the latter an intermediate-term Overbought/Oversold Oscillator. These are just two reasons I expect we would see another rally after a pullback.
And what of bonds? Well clearly they proved me wrong, and did not stop at that 1.80% area I highlighted. There are now layers of resistance all the way up as you can see. I still think a dip in rates is likely this coming week, but for now that's all I think we can get. I would note that back in August the Daily Sentiment Index for bonds was 95. It now resides at 33. So any further rally in rates could see this get under 20 in a hurry. And once it goes under 20, I start thinking sentiment has shifted too far.
But I am sure everyone will have their eyes on oil Monday morning. Oil has been in a wide trading range for most of this year. Maybe it gaps up over $60 on Monday, but if it doesn't, it's still in the trading range. A gap over $60 that holds changes the chart.