Be Ready When the Market Tops

The S&P 500 jumped another 4.13% last week ― can this rally continue? It's time to gauge where we stand today, and what to look for this week in the markets.

From where I'm standing, the market looks very overbought right now. That means that after the last three consecutive weeks of rallies that we've just experienced, the market is currently at risk of topping off and heading back down. But technical analysis is more than just speculation, so it's time we look at a chart…

While we usually use the Dow, OTC Composite and S&P 500 charts to get a glimpse at what's going on with the market at large, today we'll be looking at the Wilshire 5000 and the S&P 500 for a view from the top.

It doesn't take a rocket scientist to see that major indexes have come a long way, and are now sporting major bearish technical indicators. But you sure wouldn't know it by watching TV.

Traditional Wall Street "buy and holders" would do themselves well by taking note of this…

When the markets see bad times on the horizon (forward thinking) they run the markets higher. Why would they do that you ask? So the big, smart money that is never on CNBC can get out. Said another way: You have to sell peanuts when the circus is in town ― and one look at the last 10 days suggests that the market is the high wire act currently on stage.

Looking at the daily charts of the indexes, as well as a number of Investor's Business Daily leaders, all we see are peaks and stocks in overbought territory.

While we aren't seeing anything but a peak on the daily charts, we sure are seeing topping/bearish structure in the shorter-term frequencies ― not just on the indexes but also in leading stocks.
So, what's the bottom line right now?

In the short term as well as the long term all the ingredients are there for a pullback to initial breakouts (green lines).

The real test will be what happens after a pullback to initial breakout levels. Will we see a bounce? That bounce is what you really want to watch for, as more often than not the markets have a way of testing and returning to the scene of the crime.

If we are going to top in the next week or two, then a pullback of the recent breakouts are in order with another move up to put in a top.