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Overbought Rally at Critical Juncture

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

September 17, 2010

Both the S&P 500 Index (SPX) and it’s tracking ETF the S&P Deposit Receipts (NYSE: SPY) have moved higher for some three weeks now, but they have reached levels that could slow, or stop, the rally.

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 16, the SPX pulled back a fraction but remains within just a few points of where it closed on Monday. Four days of little gain and, importantly, the volume for this entire three week rally is some of the lowest volume for the entire year.

The early August highs are the right shoulder of a bearish head and shoulders pattern. So that previous high, at SPX 1127.29, become very important.

A close that is decisively above this level would put the head and shoulders pattern in doubt. It would also be the highest close for the SPX since back in early May.

If we get it, we would expect a continuation of the rally. If we pull back here we could see, at the least, a normal retracement of the three week advance.

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.