Still Overbought Short-Term but Bulls Bought Time in the Medium-Term


Last week we broke out to a new high on Thursday. That invalidated the lower low call and put bulls back in the driver seat for the Medium term. Once again, the overbought conditions have not yet resolved themselves but there is no reason the market can’t become even more overbought. We believe however, this breakout, which began on Thursday should fail within 5 days, talking us back the the 230 level.

This week: since we expect a new high, if we are up early in the week, we will be talking a short position into Thursday. If we are down early in the week, we will take a long position into Friday.


Bulls have now bought themselves more time. There likely will be a pullback in the short term to alleviate the overbought conditions. That pullback will almost certainly be bought and the market will attempt to at least retest the highs. This will be the next chance to see a strong Bear emerge. This time frame should also coincide with the anticipation of the upcoming French elections this April. In our opinion, a Le Pen win would be much worse than Brexit for the Market. We think it would signal the final Knell for the Eurozone.

223 is the first line that The Bears need to break to be taken seriously.  There is a better chance atm that bulls will buy this first dip over the next month before a more sustained pullback that we believe will eventually test the 215 level and possibly fill the large election gap later this year.

Volatility has become very low over the last few weeks. This is signaling things are too complacent. Couple this with very high bullish positions, and Bears could make a large stop run with little warning.

As we have mentioned, long term yields on bonds have begun to act differently than in recent years. This could be an issue if yields keep on rising. As we expected a short squeeze started a few weeks ago fueled by mandatory fund re-balances. Leg one of the squeeze has completed. Look for a second leg coinciding with the coming market pullback. We also now think the end of this Bull market will coincide with the 10year yield around 3.5%.

We are 3 for 3 in favor of the bulls, as far as early statistical barometers. So historically 2017 should be an up year for the SPX.


Long-Term Market Outlook (Updated 1/1/17).

The Calendar:

This week, the Yellen speeches should add some extra volatility to the market. Friday is also O/E day.

Next week, the markets will be closed for Presidents day and will will see the FOMC minutes on Wednesday.

Trend Following Models:

Our long-term models are Bullish.
Our medium-term models are Bullish.
Our short-term models are Bullish.