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With Stocks Overbought, A Short-Term Pullback Could Be In The Works

Market technician Dave Chojnacki of Street One Financial examines Thursday’s muted market action, which saw the major U.S. indexes finally take a breather for their relentless push higher, and updates the key technical levels to focus on as we head into a holiday weekend.

Investors were greeted with decent economic reports Thursday morning, as equities reacted by opening slightly higher. The major indices couldn’t hold those gains, however, and quickly reversed to the downside.

After several sessions of new highs, equities were due for a breather. Most of the PM session was flat as the averages traded sideways into the close. By the final bell, the major indices were little changed. The DJIA eked out a small gain, which lead to new highs. The NDX hit a new intra-day high, but closed just below the prior session’s close.

At the close, the DJIA inched up 7.9 points, the SPX fell 2 points, and the NDX slipped 1.75 points. Breadth was negative, 1.3 to 1, on average volume. ROC(10)’s were mixed in the session, with the SPX the only index declining. All three remain in positive territory.

RSI’s were little changed, with the NDX continuing to be the strongest at 81.3. All three major averages continue at overbought levels.

The three major indices continue with their MACD above signal. The ARMS index ended the day at 1.29, a slightly bearish reading. The major indices were due for a slight pause after the string of record setting highs. The DJIA eked out new highs, while the other two major indices held nearly steady.

All three major averages developed a ‘Doji’ in the session, which may be indicating a brief reversal. This will manifest itself in the next few sessions.

The NDX, which fell 1.75 points, managed to hold onto and close right at the 5300 level. It traded as high as 5316 in the session. Our new short term target for the NDX is 5362. The SPX continues well above its 20D-SMA of 2299 and its short term target is now 2382.

The VIX fell 1.7% to finish at 11.76. Near term support for the NDX is at 5300 and 5275. Near term resistance is at 5316 and 5325. Near term support for the SPX is at 2325 and 2312. Near term resistance is at 2348-50 and 2362.

Europe is mixed in early trade this morning, while U.S. Futures are pointing lower in the premarket. The only major economic report on tap today is the Leading Indicators numbers at 10:00am.

The markets will be closed on Monday for the President’s Day holiday, so it’ll be interesting to see how stocks react heading into the three-day weekend.

The SPDR S&P 500 ETF Trust (NYSE:SPY) fell $0.55 (-0.23%) in premarket trading Friday. Year-to-date, the largest ETF tied to the benchmark S&P 500 index has gained 5.01%.

SPY currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 108 ETFs in the Large Cap Blend ETFs category.

Disclaimer: The content of this article is excerpted from a daily newsletter from Street One Financial. While ETF Daily News may edit the contents and add a relevant title to the piece, the author, David Chojnacki, does not endorse or recommend any issuer or security mentioned herein.

About the Author: Dave Chojnacki

Dave Chojnacki is the Chief Market Technician at Street One Financial. He provides technical support for the Street One team and also develops individual analysis for Clients as requested.

Dave is a major contributor to the ‘ETF Daily’, a morning newsletter providing clients a daily look at market technicals of the major indices and selected ETF’s. Market trends, support and resistance levels are provided in the daily letter. The Technical portion of the daily can also be found on Seeking Alpha. Mr. Chojnacki has been quoted in a number of industry publications including the Reuters, ETF Trends, Minyanville, Yahoo Financial and Investors.Com.

In addition, Dave assists with desk trading when necessary. He possesses a Series 7 and 63.

Prior to joining Street One, Dave designed and developed I/T Systems for the Insurance and Financial Industries.

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