Greek Drama Continues

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By David Gillie

NEW YORK (ETF Digest) -- The talking heads had a Greek Festival on Friday blaming Greece for the selloff in U.S. markets. The market was extremely overbought and looking for an excuse to sell. Greece, Iran ... they'd have sold if there were rumblings in the Falkland Islands.

This week, economic news was light and earnings came in generally in order with expectations. Chairman Bernanke testified on Capitol Hill and gave the usual ramblings of the economy isn't as strong as we'd like it to be, but not weak enough for another round of QE. Although, traders were encouraged that he didn't take further QE off the table as a possibility. Basically, the economic data in the U.S. has been coming in slightly positive. Given that a president has never been re-elected with 8% unemployment, we can be assured that the unemployment rate will be below 8% for the summer campaign trail.

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The S&P 500 hasn't seen this level of overbought and lows on the Volatility Index since QE2 was in full thrust.

The only indicator I put on the chart was the Relative Strength Index to illustrate how overbought the market had become.

Since the August selloff, the market has built a rising channel (red and green dashed lines). Typically, mid-channel is a point of inflection. We saw a pause at this mid-channel resistance at the end of January. It may have appeared to have broken out last Friday, but the price hit the upper resistance at 1340 like a wall. Trading through this week was on very low volume and we saw some degree of a melt-up, but not enough strength to push through resistance. The market had to retreat to draw new buyers in to gather strength for a push higher.

A pullback to the previous 1300 support would be bullish, but probably not enough to draw in significant buyers from the sidelines. A 5% to 7% pullback is considered "normal." Seven percent would bring the S&P to 1269 -- right at the lower channel support (red dashed line) and previous price support (red horizontal line). A break below 1300 would make a lower low, but still well within the channel and unlikely to trigger panic.