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Monday was a day of crosscurrents and even though late buying recovered some of the earlier losses, it was the first loss in five days -- leaving the bulls wondering if the buying had reached its apex.
The Dow dropped below 8,000 yesterday, but that might not be as significant as the overdone internal indicators on all of the major indices. These indicators tell us when markets are overbought or oversold based on historically relevant studies.
For example, the stochastic is now "extremely overbought." Some would argue that it has been that way for more than a month, which is true. But it was overbought from July 2 to August 11 last year, before the Dow plunged from 11,800 to 8,000, and again from Dec. 8 to Jan. 6, before the Dow again plunged -- this time from 9,000 to 6,440.
And other indicators like Moving Average Convergence/Divergence (MACD), Relative Strength Index (RSI) and momentum fall into the same category of being overpriced for a four-week period. But momentum has topped and is falling -- an early warning that at least a temporary market high may have already been, or is in the process of being finalized.
The next support for the Dow is at the conjunction of the 20- and 50-day moving averages at 7,556, and resistance is at the downtrend line drawn from the November to January highs, and is currently at around 8,300.
A possible reversal in stocks following the big rally from the March lows means a trading opportunity in UltraShort S&P 500 ETF (NYSE: SDS), making it my Trade of the Day.
Sam Collins is a contributor to OptionsZone.com.
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