Last week we mentioned that the stock market had to go higher, as the RSI indicator had not moved above 70 in the NASDAQ Composite and Russell 2000.  We felt this was necessary to prove the recent strength off of the July bottom. The RSI indicator has now broken above 70 on both of these indices, suggesting that it was time for a pullback. In addition, our long-term system was becoming much closer to being overbought after the close on Monday. The current correction will calm this overbought condition and allow the market to push higher in the coming weeks and possibly months.

The first chart is of the NASDAQ Composite. You can see how the index broke above its upper trend channel on Monday. You can also see how the RSI indicator broke above 70. It is not necessary, but it is quite possible that the index will stay within the trend channel during this fall. Horizontal support is in the 2300 area. A break below this area will not effect our bullish long-term outlook.

The next chart is of the S&P 500. Last week we mentioned that the index was now moving up a steeper trendline. The lows of the last two days have broken below the line. This suggests that this steep trendline will be broken. Support is in the 1350 area, followed by the 1340 area.

The last chart is of the Russell 2000. Finally this index proved itself with the RSI indicator breaking above 70 on Monday. Support is in the 750 area, followed by the 740 area.

It is good this correction has started, as our system was becoming much closer to a sell signal. This correction will calm the overbought state and allow for another leg higher.