I wrote the following content back on February 9th for 12631 members. Given the steep “wall of worry,” it has not been a simple task to stay bullish on the market in 2012. However, we have done just that inside 12631 through clear-headed analysis and a supreme work ethic. The absurd notion that “everyone makes money in a bull market” is being debunked in front of your eyes, as the itch to fight this uptrend has been as prominent as I can recall. Don’t miss the next market move. Join 12631 today inside The PPT, and you will instantly become part of the best trading service anywhere. 

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(from February 9, 2012)

…The RSI (Relative Strength Index) on the S&P 500 Index is currently above 70, which usually denotes overbought conditions (below 30 is indicative of oversold conditions). This is the first time the RSI has been above 70 on the S&P daily chart in many, many months.

So, let’s sell everything and go all-in short, right? Well, not quite.

During a the early stages of a fresh uptrend, a market that becomes “overbought” can actually be a very bullish sign. What you are looking to see, and what I believe we have been seeing over the past few weeks, is a market that fights off hard the notion of a deep correction. To state it plainly, and this is a concept that is crucial:

The early stages of a new uptrend are usually characterized by a market that gets–AND STAYS–overbought.

We saw this off the March 2009 major bear market bottom, without a steep correction until June of that year. We also saw that in the fall 2010, without any real correction until a 4.4% pullback in November.  In both cases, the market was–and stayed–overbought for several weeks before the eventual correction. Actually, that November 2010 4.4% pullback was right when 12631 opened as a service. For those of you who were not around then, @RaginCajun and I were playing plenty of breakout plays successfully, even as the market corrected.

Ok, now let’s look (to) the RSI on the weekly S&P 500 Index. (The weekly) RSI is not overbought yet. So…we are not dramatically overbought here. Should the weekly RSI (weekly) tag 70, then perhaps that would be a reason for a bit more caution.

In the end, the price action and volume patterns of a plethora of individual stocks are most indicative of the underlying health in the market. I currently do not see broad-based, heavy institutional selling and, after the run we have seen thus far, I am inclined to stay constructive and hold my longs (or look for better acting ones), should the market stay overbought.

We are looking to see how hard the market fights off a deep correction this week…As I noted in the Pelican Room (12631 chat room) several times, if this uptrend is sustainable and in its early stages, pullbacks should be limited to, on average, 3%. Ideally, we want to see a move higher that gets us overbought again. A bullish tape is notorious for getting, and staying, overbought much more often than most traders realize.

A positive sign (that I continue to see is) the lack of heavy selling volume across the board, meaning that the large institutional players are generally not unloading shares here…In addition, my sense was that retail traders seemed quick to embrace caution/fear on the slightest hint of a pullback, which tells me the market is not so complacent as to likely not be at a major top.

There may very well be headline risk here, but price action trumps all for stock traders. Keep those stop-losses in place and respect them, but know what to look for this week. The overall technical picture has sharply improved for the bulls in 2012, and I want to have that as the backdrop for my market posture until proven otherwise.

 

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There are simply too many technical bases that are tightening up and starting to resolve higher to name in this post. It is a busy day inside the 12631 Trading Service, since we are trained to trade what we actually see, not what we think should happen, or what talking heads in the financial media tell us will transpire.

Looking at the SPY intraday chart, you can see the trend higher continues. The large institutions have shown very little, if any, motivation to unload their shares. Combined with an increasing number of setups, that is not an environment to fight the tape, yet. No trend lasts forever, but this one is stickier than usual, probably due to the amount of skeptics in the air.

Embracing the contrarian angle is a sexy option for many jaded market players. In reality, though, when the market is trending it is best to simply follow the leaders until things start to get out of hand. Of course, one person’s definition of “out of hand” differs from one another, so the crux of the issue is the price action and volume patterns of a multitude of charts across the indices, sectors, and individual issues.

In the current market, I am seeing capital “lock and roll” away from extended sectors like the biotechs were two weeks ago, down to the precious metal miners, aerospace and defense, and even the coal sector.

For now, that is more important than any bearish macro thesis, sentiment survey, or historical analog of how the price of millet traded during the Revolutionary War.

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Members of The PPT and 12631 can click here to see that the gold and silver miners saw the two highest hybrid score moves on Tuesday. In other words, The PPT algorithm detected the greatest intraday strength in the miners, of any industry in the entire market.

Overall, the market is perhaps a bit tired here. That said, calling for a top or even a correction is much easier said than done. As I noted in my recap earlier, I lightened up my portfolio. However, I still have little interest at this point in taking on short exposure. Even if many sectors and the indices undergo a pullback, we can still see a “lock and roll” rotation down to the miners.

Accordingly, I am spending tonight looking through the gold and silver charts.

 

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Well, I am not going to post all of the enticing charts that I see out there. The one chart that does stick out to me as laughing in the face of bears who say we are ridiculously overbought here is the XLE. Energy stocks have been showing more and more signs of strength lately, and it is nice to see the high beta names garnering attention. Check out the strong uptrend on the sector ETF chart below, with the support trendline holding through and through, coupled with the recent tight base. Again, far from extended and could easily just be getting started.

We are killing it inside 12631 and the community is at all-time highs, in terms of both the numbers of members and the quality of our chat room and service. Come check us out by clicking on the 12631 hyperlink.

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Despite many traders looking for either a sharp correction or a major breakout higher, the market remains stuck in a neutral 1340-1350 range in the S&P 500 on a closing basis. In essence, the lack of a short-term trend amounts to a bittersweet spinach party. Be that as it may, underneath the surface my portfolio of longs continues to work very well inside 12631. My top position today is AREX, which is fitting given how strong the small cap energy names have been lately. Beyond that, I see plenty of green on my watchlist.

The main issue that I see few talking about is the notion that the S&P is essentiality trading where it was nearly two weeks ago. So, the argument that we are correcting through time rather than price is a legitimate one. We could come in a bit more, but the fact that the market is fighting hard to prevent a violent rollover is constrictive for bulls. Moreover, the divergence between Apple’s weakness and the rest of the market in the green today is another disappointment for bears.

As the session progresses today, I am scanning to see if these morning moves to the upside stick. Even with the market in a neutral range, if individual stocks are being permitted to move higher then I am inclined to play along and add even more long exposure.

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I traded Apple on the short side for a profit last fall, but then again the stock was much weaker technically back then. Seeing that the summer and fall correction in Apple turned out to be nothing more than a consolidation before going higher, the long-term uptrend, in essence, prevailed over any short-term bearish indicators. As I noted back then, I had no interest in overstaying my welcome to the Apple short, unless I started to rack up a big win and the stock showed signs of unraveling.

Currently, Apple is printing all-time highs on a daily basis, after gapping higher post-earnings in late-Janaury. The daily chart is riding along the upper Bollinger Band, occasionally punching out of it, like today.  True, the stock is overbought, but I prefer to short weakness in a corrective market, rather than strength in an overall bullish tape.

Apart from Apple, the market is flattish with a bullish bias today. I see plenty of green on my screens, and I continue to shun the bear case until there is at least some evidence that the market is flashing topping signals. One stock that I am long inside 12631 that is acting very well this morning is Charter Communications. As you can see below, the breakout is in effect, and I am looking to see if the buying volume picks up this afternoon.

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