The strength of this rally sends a strong signal to me that this market has formed a bottom that should last for months, or more. For that reason, it's time to start trying to get long this market. However, the market appears severely overbought, and momentum indicators are not confirming the new price highs and are dragging downward on the larger time frames. You can see on my 4hr S&P futures chart above that even the RSI has failed to make any significant new highs since the S&P hit the 760 level. So that's about 60 S&P points uncomfirmed by the RSI. This is very bearish. Plus, with the amount of progess this market has moved upward in such a short period of time, some pullback and profit taking is due. The financials (XLF) has been leading this market up and down, actually brokedown at the close today and closed down almost 5% on the day. It made new lows and declined impulsively. So the short term trend appears to be down for the financials and they should drag the entire stock market down with it.
Key target areas for this decline are the fibonacci 38% retracement level and prior 4th wave area at 761, which should prove to be formidable support, as well as the 743 and 725 levels. I am mildly short the market right now but will quickly move to start establishing bullish positions once the S&P gets into the 760 area.
So, to sum up, the market appears to have formed a significant bottom and I'll be looking to get heavily long once this market pulls back enough to releive these overbought indicators. In the very short term, the market looks bearish and should take it down to the 760 level. From there I will start shifting from a short bias to big long bias.
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