SPX weekly chart below with resistance Fibs from the April high to June low. The index has been stuck at 61% level of 1363 for 5 weeks (count them) now! Twice it has poked above, only to close back below. 

A blue bar is not always bullish. Why? Because a small blue bar at resistance looks like weak buying. When buying is weak, the next move is often lower. And here the last two bars are smaller blue under resistance which increases risk of holding long positions. This does not look bullish to me which is why I recommended to reduce risk on the close of this bar. 

In this chart, we can see small blue bars at resistance to be followed by red bars several times:

1. 3/25/2012 small blue bar at high, followed by 2 red bars.
2. 12/4/2011 small blue bar under 50MA, followed by larger red bar.
3. 11/6/2011 small blue bar under 50MA, followed by 2 large red bars.
4. 7/3/2011 small blue bar near highs, followed by red bar.
5. 8/1/2010 small blue bar at 20MA resistance, followed by 3 red bars.
6. 5/9/2010 small blue bar under 20MA, followed by a larger red bar.

That said there are times when market pauses at a resistance level and then continues higher, such as 2/19/2012 to 3/4/2012. But the last week of those 3 bars did have a shakeout drop which is easier to see on the daily chart. There was also a smaller blue bar in front of resistance at 10/17/2010 but the move was a breakout up. This could still happen next week; but odds have decreased. 

There are also times with a small blue bar in the middle of a trend. If there is no clear resistance level (can be a Fib level, moving average or Bollinger band) then it is not as important. 

If you really think about it this is a nifty idea. A small blue bar when markets are at resistance, are overbought or near key previous highs is often followed by selling. So this means that sometimes a small red bar is actually more bullish than a blue bar. Because if there is not much selling pressure at a resistance level, market is free to resume higher. Examples of this are:

1. 6/17/2012 smaller red bar under 20MA resistance, followed by a blue bar.
2. 12/25/2011 smaller red bar under 50MA resistance, followed by a move above and multi-week rally.
3. 9/25/2011 smaller red bar under resistance, result next move lower lows that were bought big. 
4. 11/21/2010 smaller red bar on support which can be a very bullish combination as the next bar shows. 

So, sometimes a blue bar is not bullish and a red bar is not bearish. It depends on the context of the chart and whether markets are at support or resistance.

Terms that are frequently used around markets are "overbought" and its opposite "oversold." What do these terms really mean? 

Considering the words alone, "overbought" suggests that market is up but maybe too much, and therefore a good time to exit a long position or consider a short. Likewise, "oversold" implies that markets are down but excessively so and perhaps a buy. 

There are several ways to measure overbought and oversold. I'm going to start with an indicator that is commonly used, but one that I really don't like: stochastics. 

To be honest I'm not even sure of the math behind this indicator but it is shown on the bottom of the SPX daily chart below. This chart shows 2012 so far. 

The first thing we notice is that this index reaches overbought (above 80) and oversold (below 20) very easily. In fact, most of the first 3 months of the year were overbought! If you sold when it first reached overbought on 12/23/2011 (not shown), you would have missed the entire move this year. 

Granted there are smarter ways to use this indicator. You could have waited for a move from overbought to neutral to exit. Still, you would have sold on 1/30/2011 so still missed out the rallies in February and March. Stochastics didn't give another long entry signal - that is, out of oversold to neutral - until 4/12/2012. 

There might be some people who are able to use it successfully, but in my view stochastics becomes too easily overbought and oversold so the information is less useful. Also, using this signal generates a lot of trades; too many entries for my taste. I am using standard settings on the indicator shown, so maybe tweaking with them would give better results. 

I prefer another indicator which will be the subject of another post soon. 

Please see the SPX weekly chart below. After the correction from early April to early June, SPX was able to hold the 50MA (purple line). Since then it has been mostly higher but has had trouble at the 20MA (orange line) and 61% resistance Fib combo from about 1357-1363. This resistance zone has acted as a lid on price for 4 straight weeks and still down pressure for the current bar as well.

A breakout above 1363 on weekly close should be good to a move to 1395 minimum, more likely 2012 highs at 1422 and possibly the top of the weekly Bollinger band currently 1431.

Any follow through buying from the rally on Tuesday would look very good on the weekly chart. That said the weekly bar hasn't closed yet so we'll see what happens. 

Please see the SPX weekly chart below and resistance Fib ratios from the April high to June low. 61% at about 1363 has acted as resistance for 4 weeks now. Market is stuck under resistance. But it isn't dropping much either. 

While it is bearish for the 20MA (orange line) to be acting as down pressure, sentiment is quite negative for 2 weeks down that are still above the open of the last blue bar. In fact, I think a small red bar will look positive for the next week. More on this nifty idea in an upcoming blog post.

For now, it is unlikely that SPX closes above 1363 this week - but I don't think this is the start of a major drop either. The bar hasn't closed yet, so if Friday finishes below 1334 then it will look different. 

In a previous post I discussed using the larger view of monthly charts. These are available at www.tradingview.com. But we can even go a step up from there and check quarterly charts. This means each bar is 3 months worth of price action. I don't know of a free site with access to these (please comment if you do) but they are an option in some trading software packages.

Let's look at the benchmark S&P500 today, and in future posts I'll discuss some others. We can see mostly up from early 1980s lows to 1987 top, then a 1 bar drop which held support at the rising 20MA (orange line). After that a slow move up, then explosion higher from about 1995 to the 2000 top. After this a large bear market drop to 2002 lows which held the rising 50MA (purple line); then a steady move back up to highs in 2007, followed by a sharper drop that broke outside the Bollinger band at the 1Q 2009 low. 

Some key points.

This bull market from 2Q 2009 is much more difficult than the last two. The move from 1982 to 1993 took its time and had some major pullbacks along the way, but nothing broke monthly support. Aside from two smaller red bars in 1984 the other pullbacks were contained to one quarter. So that whole move was the first phase of a larger bull market that went to the 2000 high. The launch from 1Q 1995 turned into a phenomenal rally with 19 blue quarters compared to just 2 red quarters. There were some significant pullbacks late in the rally, but each held the low of two quarters back. 

Next check the bull market from 2002 low to 2007 high; that had 15 blue bars, 1 doji bar (unchanged) and just 4 small red bars. In that environment seeing a little bit of red after larger blue is easier to sit though. The red bars did not threaten the uptrend until late 2007 when it was overbought and near the top of the monthly Bollinger band, which was the ideal time to be exiting long term investment positions.  In other words, a nice buy and hold environment existed for a large portion of several decades:

1. From 1982-1994 even including the "crash" (in quotes because all losses were recovered in less than 2 years);
2. You could throw money at the market from 1995 to 1998, and then still plenty to be made until the early 2000 top;
3. And a nice smooth ride from 2002 to 2007. 

In contrast the current advance from 1Q 2009 has had 2 significant quarterly drops; even last quarter tested the low of the previous one before paring losses. So this means there are already 4 red bars with 3 of them containing larger drops compared to 9 blue bars. This is a much higher ratio of red than the previous advances! One red bar tested the low of 2 quarters back, and last summer's sell-off broke the lows of 2 bars back. It is much harder to buy and hold on this rally.

This means from 2007 we are not in a buy and hold market. That's 5 years. Can it last longer like this? Yes, quite a bit. 

Where is it going? There is no guarantee we see the upper Bollinger band, but if we do it will face price resistance at the close high and absolute high of the 2007 top. These are shown by the horizontal blue lines. In addition, even if the market is able to rally from 1375 area where it is today up to 1550 the Bollinger band will still be flat or even downward sloping; which means it is more likely to act as resistance. Bottom line is that if (IF) we see 1550 then that really could be a significant high. 

If the rally stalls and it cannot reach the upper Bollinger band, then conceivably the next drop should visit the 1190 area at least and possibly the lower Bollinger band. As it stands now the quarterly chart has a low outside the lower Bollinger band and recent high inside; this is much weaker than the move from 1982 to 2000. The 1980s and 1990s bull market had lows well above the lower band, and the 20MA held as support the entire move! And there were several months of highs outside the Bollinger band indicating very enthusiastic buying. 

If anything this current 2009+ rally is just getting tougher. 4 healthy blue bars, then 1 red; 3 blue bars, 2 red; 2 blue bars, 1 red... a string of 3-4 up quarters like previous bull markets is just not guaranteed! That said I think timing factors mean this quarter has a very good chance at a solid advance and healthy blue bar. But I'll be very careful to watch various resistance levels on other timeframes (monthly, weekly, daily) because it is possible that one or two more up bars (on this quarterly chart) are all we are going to get. 

To really see the move check chart #2. This is actually the same chart and same index but in log scale. This shows the bars as percent moves rather than absolute numbers. In other words, a 100 point S&P rally mean a lot more in the early 80s with the index itself at just 100 (so that would have been a 100% move). But today 100 more points is a lot less in % terms. The second chart makes this clear. In this chart it is even more obvious that the market has been sideways from the 2000 top. 

A typical move from here would be up to the top of the Bollinger band, rejection from there to support which is currently 1190 area, then a turn up from there could produce new highs. All this could take many quarters to play out (which means 2-5 years). Even in a bullish scenario it would take a lot of buying strength to power through the 2007 high area, which just doesn't seem likely given the struggle of the advance so far. In other words even if up market will probably have a significant decline from that 1550 area. 

A more bearish scenario would be failure before reaching 1550, then break of 1190 support and a sharper drop. It will be interesting to see what happens.