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Overbought Rally at Strong Resistance

|Includes: SPDR S&P 500 Trust ETF (SPY), SPY

September 10, 2010

Both the S&P 500 Index (SPX) and it’s tracking ETF the S&P Deposit Receipts (NYSE: SPY) have moved higher over the past two weeks, but there is strong resistance ahead and the markets are very overbought.

Since June there have been three attempts by the SPX and SPY to break out of the correction declines and start an advance. The first two failed at the SPX 1120 and SPY 112 levels.

On Thursday September 9, the SPX rallied to 1110.27 and the SPY rallied to 111.68 before reversing. Both closed higher, but with reduced gains for the day.

The SPX 1110-1120 level and SPX 112-113 level are again just above and must be decisively surpassed in order to sustain a new advance. It remains to be seen if this can happen.

A wedge or pennant pattern is developing on the daily charts. This is created by drawing a line through the closing highs of the August and current rally and extending the line to the right of the chart. Do the same for the closing lows of the early July and late August declines.

This creates the pennant pattern and typically when such patterns are broken, they determine the direction for weeks to months to come.

Pennant patterns usually break in the direction of the prior major move, and that was the May - June decline. So the odds favor a break to the downside and lower lows ahead.

The stock market can fool anyone at any time, but the patterns we see do look ominous.

The ( ETF Timing Strategy has a position in the S&P 500 SPDRs.

Disclosure: The ( ETF Timing Strategy has a position in the S&P 500 SPDRs.