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Unwinding..... Stock Market Bearish Case Takes A Bit Of A Hit...

Stock-Markets / Stock Index Trading Sep 04, 2009 - 02:04 AM GMT

By: Jack_Steiman


The bearish case, which just a few days ago, looked pretty good, now has a bit of a problem. Let me first say that the bearish case is far from dead. There are lots of possibilities out there that can play out bearishly but the near term picture has changed a bit. The biggest headache for the bears is the fact that we had some very overbought daily charts with some nasty negative divergences in place. These charts have really unwound most of the overbought conditions and the Macd's have thus pulled way down, working off those nasty divergences.

Do they now look good? I wouldn't go that far but they have played out quite a bit and now we have those Macd's, once at very lofty compressed levels, back to their zero lines. Once they unwind back to their zero lines, the bearish case becomes much more questionable. It can still work but it won't be nearly as easy. The Macd can certainly push well below that zero line but it's never as easy to do once all of the oscillators have unwound quite a bit such as they just have. Stochastic's once near 100, are now near 30. Rsi's once at or even above 70, are now near 50. The 60's are unwound as well and looking pretty decent. In addition, many stocks are exploding off of 50 day tests now thus the market is not going to fall below the 50 day exponential moving average without first blasting up some. Big money is still buying strong stocks back testing the 50's, which is just what the bears don't want to see.

So what is the down side risk in this market? SP 1005 and Nas 1933 which is where those 50 day exponential moving averages exist today. They change slightly each day but the moves are now very small as real price moves closer to the existing 50 day number. We have traded above that level for so long, it almost guarantee's that we'll see a strong move off of it should we get that low and getting that low is a real possibility if tomorrow's jobs report is poor.

It doesn't necessarily even need a bad jobs number to go down that low but a bad report will certainly, if nothing else, expedite that process. We can't ignore the big down day from Tuesday but we also don't want to necessarily make more of it than we should. It started the market down off those negative divergences. The unwinding has been rapid and we're not even near the 50's yet thus I would warn anyone from getting too bearish should we sell off to those levels in the days ahead.

Jack Steiman

Jack Steiman is author of ( ). Former columnist for, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

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© 2009

Mr. Steiman's commentaries and index analysis represent his own opinions and should not be relied upon for purposes of effecting securities transactions or other investing strategies, nor should they be construed as an offer or solicitation of an offer to sell or buy any security. You should not interpret Mr. Steiman's opinions as constituting investment advice. Trades mentioned on the site are hypothetical, not actual, positions.

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