Weekly Commentary 2/9/12

By Lawrence G. McMillan

The stock market refuses to back off. This is making TV commentators gleeful, but experienced traders are finding such one-sided action to be a bit dangerous.

$SPX has not yet exceeded the 2011 highs, although many other broad-based indices have.  Thus, there is resistance in the 1360-1370 area.  If a correction should occur, there should be support at 1290- 1300.  Below that, the trend line that defines this bull phase is now at about 1270.  Any correction should be limited by that trendline, but if it should be broken, that would be very bearish.

Equity-only put-call ratios are getting rather extended (overbought) and some have already rolled over to sell signals.    Breadth has been quite strong this year, and the breadth indicators have remained on buy signals. However, they too have become quite overbought. market will correct.

Volatility indices ($VIX and $VXO) have started to creep higher this week. $VIX has risen on three of the last four days.  While this certainly doesn't reverse the downtrend of $VIX (which is bullish for stocks), this is a bit of a warning perhaps.

In summary, while the intermediate-term indicators remain positive, the danger of an overbought correction is looming.  The longer it is postponed, the more likely it is that it will be severe.

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