MARKET PULLS BACK FROM SHORT-TERM OVERBOUGHT CONDITION -WEEKLY AND MONTHLY INDICATORS, HOWEVER, SUGGEST THERE'S MORE UPSIDE TO COME -- THAT'S ALSO TRUE OF THE NASDAQ AND FINANCIALS

CCI IN OVERBOUGHT TERRITORY ... The stock market is undergoing its second straight day of selling. One of the reasons for the pullback is short-term overbought readings in some of our more sensitive momentum indicators. Chart 1, for example, shows the Commodity Channel Index (CCI) reaching overbought territory above 100 and forming a small "negative divergence" over the past week (red line). The chart shows previous overbought readings during early January and February. All that tells us is that the recent rebound has probably gone too far too fast and is due for a setback. The fact that the S&P 500 has retraced approximately two-thirds of the January/March decline also suggests an over-extended market. The hourly bars in Chart 2 show some potential underlying support levels. The most obvious one is last week's reaction low just below 780, which also coincides with a 38% retracement of the March advance. A pullback to that level would be normal action in an ongoing price advance. Obviously, a closing violation of that support level would suggest a deeper retracement of 50% to 62%. So far, all that these charts tell us is that the market is pulling back from a short-term overbought condition. They don't tell us if this is just a normal setback as part of an intermediate price advance or the end of the rally. We need to look at our weekly charts to help us with that.

Chart 1

Chart 2

WEELY INDICATORS STILL ADVANCING... Weekly indicators are usually more important than daily ones. And, at the moment, the weekly indicators paint a more encouraging picture than the dailies. Chart 3 overlays the Commodity Channel (CCI) Index on weekly bars of the S&P 500 over the last two years. The last two major overbought readings (over 100) occurred in October 2007 and May 2008 which coinciced with important market tops. At the moment, the weekly CCI has risen to the highest level since mid-year, but is nowhere near major overbought territory. [It is, however, approaching the mid-point (zero line) which might present some resistance]. Several of our other weekly indicators (like MACD and stochastics) remain in positive territory as well as shown in Chart 4. That being the case, I'm not ready to to call an end to the recent rally. I still think there's a good chance that the S&P 500 will eventually approach its January highs once the current pullback has run its course. Chart 4 also shows that the market still has a ways to go to reach its 40-week moving average. The last time it was tested was last spring. A retest of that major resistance line seems overdue.

Chart 3

Chart 4

NASDAQ COMPOSITE PULLS BACK FROM 1600... The technology-led Nasdaq has been the strongest part of the market so far this year. The daily bars in Chart 6 show the Nasdaq Composite Index pulling back from its February high near 1600. The daily stochastic lines are over 80 and overbought. The COMPQ, however, was the first major index to cross over its 50-day average and still remains well above it. That would be a logical spot to expect support on any short-term setback. The weekly stochastic lines in Chart 7 are still rising and haven't reached overbought territory. That suggests there's likely more upside to come.

Chart 5

Chart 6

FINANCIALS GETTING BETTER ... One of the keys to the direction of the stock market is the direction of financial shares. And there may some good news there as well. The daily bars in Chart 7 show the Financials SPDR (XLF) consolidating just below its March high (and well above its 50-day average). The trendline has the look of a "neckline" in a potential "head and shoulders" bottoming pattern. A close over 10 would complete that pattern and push the XLF to the highet level in three months. The same is true of its rising relative strength line at the bottom of the chart. The monthly chart also suggests some reason for more optimism. Chart 8 shows the monthly Commodity Channel (CCI) Index rising from major oversold territory. That's the strongest position the CCI has been in since it turned down in mid-2007. That's an encouraging sign for financial shares the rest of the market.

Chart 7

Chart 8