If you checked your favorite internet finance site after 4 PM yesterday and saw that the SPX closed lower by 5 points, I think you’ve gotten the wrong impression of what is taking place here. Let me tell you how this works. First, the SPX will defend a key level, say 1340. It will eventually trade through that level in the direction of the current market (negative). It will require a moderate sell-off–not too scary, but not too weak. Then, as market participants fear that level has now become resistance, they will take the opportunity to sell their long exposure near that level. Eventually, you are left with more opportunists than natural sellers and prices rise. The velocity of that price rise varies with the ratio of opportunists to sellers. Make no mistake about it, we are in the late stages of that process now.
SPX 1341 was yesterday’s Overbought level and, not coincidentally, the SPX topped out at 1341.78. Today’s OB / OS levels: 1334 / 1314; twenty points of range and the SPX closed out Wednesday right in the middle. I think the SPX begins to put pressure on the Overbought level.