Will BAC be the catalyst for a correction?

A story is breaking this evening at the Wall St Journal regarding BAC needing an additional $34B in capital to survive. This news has caused the futures to dip quite a bit. So, I wanted to take this opportunity to post an update of my thoughts on the overbought indicators I am seeing on the SPY.

I read a post earlier by Keith Shepard (@keithshepard) where he talks about the NYSE Bullish Percent Index approaching overbought levels, and how it might be time to be defensive. On the SPY chart, I have included the traditional Stochastic and RSI indicators on a weekly chart. The stochastic is setting up as a high percentage low risk sell, but is yet to be triggered. 1 or 2 down weeks will trigger this signal and the market should go through some correction - how much is yet to be determined. My initial target would be around 80-81 for a minor correction, and around 60-63 for a more severe retracement. The RSI indicator is also overbought at these levels and one can see the historical response to these levels on the chart. Declining volume over the last few weeks is also of some concern.

The question we have to ask is: will BAC or stress tests results or any bad news for that matter, produce enough of a catalyst to induce a round of profit taking. If so, then the next dilemma becomes do we buy the pullback or watch this market sink to new lows? One step at a time. Let's get a pullback first and then we can react to the market as it unfolds.

I personally think a pullback is going to provide some fantastic opportunities for longs in leading sectors.

In the words of the always real @tickerville: Let's keep it real.

Good luck.