As most of you may be aware on Thursday the market sold off very hard on high volume only to rally nearly as strongly on Friday on high volume. As you can see in the weekly SPY chart the market closed higher than last week. What to make of this? On a daily basis the market has clearly gotten more volatile and choppy but on a weekly basis the market continues to grind higher. On a longer term basis I look at four metrics to confirm trend reversals. One of them is whether the market is overbought (in a rising market) and oversold (in a falling market). The market is CLEARLY overbought right now. But price action is favorable; on a weekly and monthly basis the market continues to make higher highs and lows. Sentiment remains bullish and there are no major resistance levels blocking any further up side advance.
CONCLUSION
The market is still clearly bullish on a long term and intermediate term basis; but is way overbought and due for at least a mild correction. All it would take is for a confluence of other metrics to line up to make this happen. IMHO now would be the time to be cautiously optimistic, increasing exposure to the market only as it proves it can move higher, and be quick to reduce positions when the intermediate term picture becomes bearish.
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