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Stock market overextended

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

Today the market was yet another surprise. S&P 500 gapped up and basically broke through the major resistance level. All happened because of job claims data. When I reviewed them I didn't consider them that amazing. Apparently good enough to bring another wave of enthusiasm to the market.But the volume was once again quite low. During summer days it is typical that the volume is lower then during the rest of the year, but we should not see that low volume with such run. In my own view, this market is overdue for a correction.

 

SPY

 

As I mentioned in my previous post, the last week run was too fast and too extended. When comparing the chart to the similar run in nearest history we can see, that we ran up to the same highs within a week. The market typically ran that high for a whole month! Then in March 2011 we had a large correction and then a recovery. At the beginning of April we had another downturn dip and then we continued back up. At the beginning of May 2011 we had a nasty correction and last week and a half we recovered almost all loses. If we believe that the market is cyclical, we are due for a small break.I am expecting the market to correct back down to either a 50 day SMA or maybe even lower to April's low.However, there may be a catch here. This bullish behavior will attract new buyers and we may actually skip the correction! I am still bearish, but cautious. If new positive earnings news enter the market, I will have to change the side of the market.Happy trading

Disclosure: I am short SPY.