Mushiness Pouring Down

Last week’s exuberant bounce took the market back up to the May 29th level from which we initially broke down. At that point, the issue of “overhead supply” became relevant. In essence, overhead supply dictates that those longs who have been holding for an extended period of time during this 11% broad market correction are much more likely to sell, than they are to buy more or hold, once they come close to breaking even on their losing trades. To be sure, longs from above 1400 on the S&P 500 have quite a journey ahead of them to break even. In particular, though, the bulls who bought stocks back in late-May looking for an oversold rally has trapped themselves with the subsequent rollover down to 1266.

Since then, those trapped longs have come pretty close to breaking even and have likely taken some chips off the table. I would argue that the resistance the market found today and last Thursday up at around these levels can, in large part, be chalked up to overhead supply hitting the market. What we have this morning is a mushy tape, trying to work off the supply without rolling over once again, despite the headlines out of Europe. The good news for bulls is that so far the market is hanging out up at these levels. However, it is still early on and we just have to see how this plays out.

The real issue now becomes whether we have the buying power out there to ultimately push us up through this resistance at about 1335 on the S&P 500. On the Nasdaq Composite Index daily chart below, the precise 2,882 level is acting as a level that brings out some overhead supply. Even if the bulls can break past these levels, the overall market remains in correction with the bevy of declining 50 day moving averages. I would expect a test of that reference point, but not too much else just yet.

Even if the market has truly bottomed, of which I am not entirely convinced, the process of building a coiled spring off of which stocks can sustain multi-month uptrends can be a tedious one, draining you of your energy and confidence, and your account of commission fees.

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