Stock Market Hits Gap Resistance

Stock-Markets / Stock Index Trading Sep 16, 2009 - 02:50 AM GMT

We hit the gap today with the S&P 500 hitting a drop over 1056. Just a couple of points below 1060, thus the gap has been hit. The question now is, how far do we pull back and what can we expect once the selling is done?

To answer the first point, you don't have to look very far to see there are loads of beautiful bases and flags set up just about everywhere. Sector after sector is showing a lot of great charts which suggests that the selling to come shouldn't be very deep. Of course, there's always the chance that we will bust right through this gap but I'd put the odds on that at less than 5%. It would take news I can't imagine to make that a reality.

Keep in mind that we are also overbought so moving through this type of gargantuan resistance is going to take time, like it or not. That doesn't mean you should own some stocks. You can, but the routine of buying weakness will be a good way to go in the next few days and weeks. 1018 remains very powerful longer term support. That gap on the down side is as strong as the gap we're dealing with here on the up side. I do not expect us to test down that low although it's always a possibility. The bid for now is just too strong, but when you move in to this type of strong resistance, anything is possible as we fail the first time trying to get through.

In terms of answering the second part of the equation, once the selling is done, based on the chart set ups I'm seeing, I think there's a very strong chance we'll get through 1060 and move towards 1100/1125. Be warned though that this is not a guarantee by any means and we will have to watch the nature of the selling that takes place short term. Whether it's strong or more of a lateral unwinding of the oscillators. Again, I think we'll get through eventually but please don't bet the farm on it or think for sure it's going to take place.

This bull could be over right here at this gap but I don't believe so. Just too many good looking charts overall. If we do clear 1060, the move up is likely to be pretty red. Big money will pour in over this tough resistance. Day-to-day as we see what this gap has in store for us all.

Over the weekend I wrote about 1060 gap resistance on deck. These gaps, once we get close, within 2% or so, are usually magnets. Retail money, if nothing else, will chase the market thinking the gap will get hit. Big money, even if their intentions are to sell, will allow the retail money to get to that gap and then they'll do their dirty deed of selling the gap. They have nothing to lose by allowing the retail investor or trader to bring things up to that last point of tough resistance.

Gap downs this week were bought and today was no different. We had great numbers on retail sales and CF MSCI EAFE PPELN (PPI) this morning. The futures rocked higher but sold off before the open, which caused a small move lower once the bell rang for trading. It didn't take too long, as usual these days, for the retail players to come in and take us green. We spent the rest of the day getting to the gap and then selling off some in to the close. Nothing big but you could see bigger trades coming in to bring things down at this gap. There's programmed selling already in place from long ago to sell if we ever got to this level, so that alone made getting through today virtually impossible. A good stick for the day but nothing to get overly excited about as it only made us more overbought in front of this 1060 beast. The first chart tonight shows the tale. Study it again.

The dollar continues its massive move lower. Nothing seems to help this poor chart on the PowerShares DB US Dollar Index Bullish (UUP). Strong positive divergences. Strongly oversold. Nothing! You get bullish hollow candles and no follow through. No one seems to want to own the dollar. People want commodities with tangible value. There will always be rallies but as long as the dollar struggles, it appears the market will want to trend higher with commodity stocks being the biggest winners.

The dollar recently broke down from a pretty long bear flag and that doesn't bode too well for the longer term. They used a gap down out of that flag to boot, making the journey for the dollar bulls a very tough one. Keeping a close eye on this situation as it unfolds. It will help me understand just how much selling we may see from this gap resistance we're at here.

We have been on the right side of this market since the bottom and we're proud of that. I have felt strongly that shorting a confirmed buy signal, especially the latest one when we cleared S&P 500 956, doesn't make any sense. I suggest that you follow the trend in place and not play the one you think should be in place.

I have had many emails suggesting the short side of the game whenever we sell but selling is fine unless you take out critical support, now at 1018 S&P 500.

Above that, any selling is just noise in a continued bullish signal. If you do short, make sure you're not short very much if and when we clear 1060 S&P 500. That's not something you'll be happy about day-to-day. Study all of the charts provided tonight. Look at the first chart and the 1060 gap. Notice the massive volume breakdown gap this level had been at previously. It won't get taken out on the upside very easily.

Go easy here.

Peace
Jack Steiman

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

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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