Market Extended. Expect Pullback

The ES (E-mini S&P 500) is up almost 120 points in less than a month and in that time the two largest declines were from the high on Jan 4th for 17 points and from the high on January 11th for 14.75 points. The market is extended and is due for at least a small pullback. The ES is testing the 1500 level while the S&P 500 cash index has already closed above the psychological level. I like shorts up around the 1500 level on the ES, though there is a good chance we see a pierce of that level. We'll see how price action is this morning. I will post in the comments if I do take a short.

While I am speculating that we are due for a correction to begin this week (at least a small one), markets remain bullish and we need to see some confirmation before gaining confidence in the trade. When aggressive, or entering a trade early, I want to see the trade go in my favor quickly. If it does not, I will exit the trade before experiencing any significant heat. Bottom line is to plan the exit strategy beforehand based on different price action scenarios, that way emotions don't come into play and I know how to respond ahead of time.

In any case I am anticipating a downturn and I have listed some of the reasons why below:

• Market over-extended without seeing any significant pull-back.
• Unrest in the middle-east. Riots in Egypt could be the pre-cursor to an "Arab Spring II."
• The market may be moving in the opposite direction as Apple right now, but that is likely to reverse.
• The Nasdaq index is showing signs of fatigue, much of it to do with Apple, but it has to at least be considered as a potential leading indicator.
• FOMC minutes to be released on Wednesday. If there is any mention that quantitative easing could or should end early, that will provide an excuse to sell this over-extended market.
• Other news releases this week to be aware of, GDP on Wednesday, Jobless Claims on Thursday and Employment Situation on Friday.
• Lets not forget that while the stock market may be at levels not seen since before the recession began, the employment situation has only managed to regain half the total lost jobs. That math doesn't quite add up and leaves room for concern.

That's it for now, lets see how this week begins. I will be looking for short opportunities as the ES makes any new highs. If trading multiple contracts, easing into a short trade here in the upper 1490s isn't a bad idea either.

Levels to watch on the ES (H, March 2013 Contract):

Resistance above at 1499-1501, 1505-1506, 1509-1510

Support below at: 1491-1492, 1486-1487, 1479-1480, 1470-1471