Don’t be Fooled by a Slow Bull

Sept20 swing trading .-  Although upside volume has slowed, move higher is not over

By Sam Collins, InvestorPlace Chief Technical Analyst.

 Stocks got an opening kick Wednesday following an injection of capital by the Bank of Japan in its own version of QE. And later an uptick in existing home sales and building permits helped stabilize the market. But the initial move up only lasted until noon, when profit-takers entered the market and dominated the afternoon trading.

At Wednesday’s close, the Dow Jones Industrial Average was up 13 points to 13,578, the S&P 500 gained 2 points to 1,461, and the Nasdaq rose 5 points to 3,183. The NYSE traded 643 million shares and the Nasdaq crossed 417 million. Advancers led decliners on the Big Board by 1.4-to-1, but decliners were ahead of advancers on the Nasdaq by 1.1-to-1.

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The Dow has broken from its restraint at 13,275 (see Wednesday’s Daily Market Outlook), but it is now bumping against a resistance line drawn from July 2011 and connecting with the March and May highs. This plus a Relative Strength Index (RSI) number, which at 71.36 on the breakout was the highest of the year, could cause some near-term problems. 

RSI is generally accepted to be “overbought” above 70. Also noted on Wednesday, the stochastic flashed a near-term sell signal. Support rests at the breakout line at 13,275, and confidence is high that the Fed will keep pumping in the necessary easing to keep stocks moving higher. 

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RSI for the S&P 500 hit 74.74 last Thursday. This was its second highest reading of the year, surpassed only by 75.38 in March. The March reading led to a double-top and the sharpest correction of the year. 

Conclusion: Although the S&P 500′s RSI on Thursday was into the “overbought” zone for the indicator, and the market’s upside volume has slowed, don’t be fooled into thinking that the move higher is over. Our internal indicators are overbought, but the price action has been strong and the breakout volume at 14-to-1 positive breadth can’t be ignored. This week has been slow, but slow in a bull market results in solid consolidations and platforms for higher prices.

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