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Stocks Are Still Overbought, but Signal of Top Hasn't Arrived

Stocks in this article: MCP NVDA PCLN RAX

NEW YORK ( TheStreet) -- The major equity averages traded lower last week, with day-to-day volatility around my monthly pivot at 3663 on the Nasdaq. The Nasdaq stayed well below its semiannual risky level at 3759.

All the other major averages stayed well below their monthly and semiannual risky levels, which are 16,188 and 16,490, respectively, for the Dow Jones Industrial Average; 1742.5 and 1743.5, respectively, for the S&P 500; 7087 and 7104, respectively, for the Dow Transports; and 1092.24 and 1089.42, respectively, for the Russell 2000.

This week we have weekly risky levels at 15,579 for the Dow industrials, 1703.7 for the S&P 500, 3699 for the Nasdaq, 6509 for the Dow transports and 1071.67 for the Russell 2000, which should limit the upside potential.

Fundamentally, the ValuEngine valuation warning continues, with 75.6% of all stocks overvalued with 42.1% overvalued by 20% or more. Fifteen of 16 sectors are overvalued, 14 by double-digit percentages. Six are overvalued by more than 20%.

Technically, four of the five major averages ended the week with overbought momentum on their weekly charts. The only average not overbought is the Dow transports.

With the stock market overvalued fundamentally and becoming overbought technically, we are on the lookout for a signal that would confirm the Aug. 1 through Aug. 5 cycle highs as a significant market top. This would require weekly closes below the five-week modified moving averages with momentum readings declining out of overbought territory.

To review, my measure of momentum is a 12x3x3 weekly slow stochastic reading, which scales from 00.00 to 100.00 where readings of more than 80.00 are overbought and readings of less than 20.00 are oversold.

The five-week modified moving averages are 15,362 for the Dow industrials, 1669.6 for the S&P 500, 3566 for the Nasdaq, 6440 for the Dow transports and 1026.63 for the Russell 2000.

All five averages must be in sync to confirm a market top. This requires simultaneous weekly closes below the five-week MMAs with all momentum readings declining to less than 80.00. Without having this confirmation, another round of new highs remains feasible.

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