The Major Equity Averages Face Weekly Key Reversals

NEW YORK (TheStreet) -- The major equity averages set new multi-year highs or all time highs earlier this week. This strength plus a rise in the yield on the 30-year US Treasury bond generated a ValuEngine Valuation Warning with more than 65% of all stocks overvalued. This is the fundamental condition that typically occurs when timing a stock market top.

Technically, I have been tracking the major averages into overbought territory on their weekly charts since the beginning of the year. It wasn't until two weeks ago when all five major averages had overbought weekly chart profiles.

All major averages will end today with continued overbought readings on their 12x3x3 weekly slow stochastic at; 89.02 Dow Industrials, 90.08 S&P 500, 86.71 Nasdaw, 93.39 Dow Transports and 91.77 Russell 2000. Readings above 80.00 indicate overbought momentum.

Even with overvalued weekly momentum, today will time a technical reason for a market top if the closes are below lost week's lows at 13,906.73 Dow Industrials, 1513.63 S&P 500, 3182.19 Nasdaq, 5892.24 Dow Transports and 910.22 Russell 2000. This would confirm simultaneous weekly key reversals for all five major equity averages since Dow Transports and Russell 2000 set new all time highs this week, while Dow Industrials, S&P 500 and Nasdaq set multi-year highs.

Given weekly key reversals and lower closes the next two weeks, weekly momentum readings should be declining below 80.00 with weekly closes below five-week modified moving averages (MMA). This would result in negative weekly chart profiles.

This week's early strength had the major equity averages within the zone of my longer-term risky levels. The Dow Transportation Average led the way to an all-time closing high at 6020.67 on Tuesday, which was above my annual and semiannual pivots at 5925 and 5955.

The other major averages could have semiannual risky levels at 14,323 Dow Industrials, 1566.9 S&P 500 and 965.51 Russell 2000. If we do not confirm weekly key reversals today, there could be additional upside. However, with negative daily charts, the odds favor that we will confirm a stock market top even without weekly key reversals.

My recommended investment strategy in this market environment has been to sell strength to risky levels and reduce exposures to the stock market by at least 50%. This is a contrarian opinion as most buy-side and sell-side strategists on financial TV are telling investors that stocks remain cheap and to buy dips. I strongly disagree as there is nothing wrong with profit-taking.

Here's my weekly review of the key levels for the U.S. capital markets:

The Yield on the 10-Year Treasury note (1.984%) -- The weekly chart still favors higher yields, but my annual pivot at 1.981% was a magnet again this week. My annual and semiannual value levels are 2.476% and 3.063% with the annual pivot at 1.981% and a monthly risky level at 1.843%.

Comex Gold ($1578.5) -- The weekly chart remains negative with a close today below the five-week MMA at $1644.7. The 200-week simple moving average (SMA) is $1,410.8 with my annual pivot at $1,599.9 and semiannual, monthly, quarterly and annual risky levels at $1,719.2, $1,793.8, $1,802.9 and $1,852.1.

Nymex Crude Oil ($93.11) -- The weekly chart shifts to negative on a close today below the five-week MMA at $93.99. The 200-week SMA is $86.29 with monthly and quarterly pivots are $96.21 and $95.84 with my annual risky levels at $115.23 and $115.42.

The euro vs the dollar (1.3189) -- The weekly chart stays negative on a close today below the five-week MMA at 1.3292. The 200-week SMA is a resistance at 1.3530. My semiannual value level is 1.2797 with my annual and quarterly pivots at 1.3257 and 1.3334 and monthly pivot at 1.3570.

The Dow Industrial Average (13,881) -- Quarterly and annual value levels are 13,668, 12,696 and 12,509 with monthly and semiannual risky levels at 14,132 and 14,323. The October 2007 high is 14,198.10 with the all time closing high is 14,164.53 set on October 9, 2007. A close below last week's low at 13,906.73 defines a weekly key reversal.

The S&P 500 (1502.4) -- Quarterly and annual value levels are 1431.1 and 1348.3 with monthly and semiannual risky levels at 1542.9 and 1566.9. These major risky levels are below the October 2007 high at 1576.09. A close below last week's low at 1513.63 defines a weekly key reversal.

The Nasdaq (3131) -- Quarterly and annual value levels are 3071, 2806 and 2790 with my monthly risky level at 3250. A close below last week's low at 3182.19 defines a weekly key reversal.

The Dow Transportation Average (5875.56) -- My annual, monthly and quarterly value levels are 5469, 5440 and 5094 with annual and semiannual pivots at 5925 and 5955. A close below last week's low at 5892.24 defines a weekly key reversal.

The Russell 2000 (905.4) -- Annual, quarterly and annual value levels are 860.25, 821.01 and 809.54 with a monthly pivot at 911.32 and semiannual risky level at 965.51. A close below last week's low at 910.22 defines a weekly key reversal.

Nasdaq 100 Index (2712) -- Did not set a multi-year high this week and strength stayed below my quarterly risky level at 2798. My annual value level is 2463 with monthly risky level at 2870.

PHLX Semiconductor Sector Index (416.27) -- A close this week below 423.18 would be a weekly key reversal for semiconductors, but the week's high was not a multi-year high, but was a new year to date high at 433.93. My quarterly value level is 371.62 with a monthly pivot at 409.08 and quarterly risky level at 440.36.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined www.ValuEngine.com in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at RSuttmeier@Gmail.com.

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