Overbought market does not mean sell...yet

By Lawrence G. McMillan

The Fed’s announcement that they were not going to taper was a big sigh of relief for many traders, and the resulting buying explosion was powerful.  Short covering was certainly prevalent as well.  $SPX and other major indices blasted through to new all-time highs.  In doing so, there were a number of overbought conditions that were triggered, but on such a powerful breakout, an overbought condition is actually conducive to higher prices – for a while. $SPX should find support at 1710, the old high.  However, it is now above the 4 standard deviation modified Bollinger Band (currently at 1709), and that is a severe overbought condition.  A close below that band (which moves every day) would be a sell signal, but as long as $SPX stays above the band, it can work higher.  For example, in May when a similar condition occurred, $SPX rose another 37 points (intraday) before selling set in...

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