A pullback here would be very healthy for the stock market. We mentioned in last week's commentary that our long-term system was much closer to a sell signal last Monday. Currently, our system is showing a more moderate reading, suggesting that the stock market still has quite a bit further to climb. Its amazing how seven days of sideways movement can kill a near overbought condition. Regardless, a pullback here would be ideal as it would allow for significantly higher gains in the weeks and months ahead.

The first chart is of the S&P 500. You can see how the index reached our resistance lines. This is the area we felt the S&P 500 would get to before a pullback. A push to 1400 before that pullback would not be surprising, but it is equally likely that the top is in for now. Our target for this buy signal is indicated on the chart (1450-1480 area).

The NASDAQ Composite has been in a sideways pattern for several days. If the index does not break above this pattern in the coming week it will break through the lower uptrend line in the trend channel. The recent action suggests that the NASDAQ is in the process of creating another base or trend channel and breaking away from the channel that started in August. This kind of sideways action is rarely seen in a trend channel. Most likely a new base is beginning to be formed. A break above the recent sideways movement would push the NASDAQ above 2006 highs, while a pullback should bring the index to the 2300 area.

The Russell 2000 is in a similar situation. A break above its recent sideways movement would push it to 2006 highs at a minimum. A pullback would most likely end in the 740 or 750 area.

With the recent move higher, all of the indices we follow are well above significant support levels. Therefore, a pullback would not hurt the long-term uptrend and would be very healthy for the overall market.