28Feb11:05 amEST

Don't Get High on Your Own Overhead Supply

One of the more interesting aspects about the two-month rally which commenced on Christmas is how universal the opinion seems to be from market players and pundits alike that the current tape is rather extended as the major indices are seemingly bumping their respective heads against prior, tough resistance from late-2018. 

On the surface, that view seems sounds and perhaps entirely logical.

But seeing as the market often likes to fool the majority and play tricks on fairly obvious scenarios, I would not be surprised if soft mornings, like the one we are seeing as I write this, serve mostly to give bears a healthy dose of false hope before we push higher yet. 

Case in point: We have some decidedly ugly earnings reactions last evening, namely BOX FIT, even SQ, on top of concerns of the CELG buyout hitting some roadblocks. And, yet, we are not seeing a bloodbath in the market or anything close to it, yet.

True, there may be a delayed reaction, as bears argue we are simply churning now before a drop later. But, again, the burden is on the bear side as bulls have controlled the tape for two months now. 

On that note, it is worth repeating the concept of "overhead supply," and what it means. When price arrives back at a difficult area from which it previously failed one or more times, the presumption is that longs will likely sell or hold rather than buy more as they have just broken even. This notion derives from psychology--When you have had a wild roller coaster ride you usually just want to get off the ride at a certain point and back onto level ground. 

Hence, with the SPY (ETF for the S&P 500 Index) weekly chart, updated below, we have that overhead supply setup currently in play, as price has indeed arrived back in a virtual straight-line rally to the late-2018 hesitance area just above $280 (or 2800 on the S&P). 

And, yet, we must repeat that the only "given" with overhead supply is that we presume an initial, expected, pause, and not the green light to call a major market top. 

Too often, market players extrapolate overhead supply as evidence per se of a top, when in fact nothing could be further from the truth--Just consider that the market has shown persistent, even unique, strength for two months. We are looking to see if underlying demand for equities will "absorb" the overhead supply. 

As a result, we are letting this initial, expected pause or digestion in the market play out without making too many assumptions, just yet. Bears would need to inflict far more selling on far more damage and pounce on weak earnings report at-large to get the ball rolling back downhill and for the overhead supply to truly usher in a new leg lower. 

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