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Stock Market Collapses Through Support

Stock-Markets / Stock Index Trading Oct 02, 2009 - 03:29 AM GMT

By: Jack_Steiman

Stock-Markets

Best Financial Markets Analysis Article1046, 2090 and 9648 on the S&P 500, Nasdaq and Dow respectively. Those are the magical 20-day exponential moving averages that all went down today without a fight. The market didn't even have to gap below those levels to get the job done. Normally, important levels of support go away through morning gaps but today we saw the bears take control and just destroy those 20-day exponential moving averages.


The market gapped down a bit but traded just above those 20's until 10 am Eastern Time when the ISM report came out showing manufacturing had stayed above the magical 50.0 levels, coming in at 52.3 and basically right on consensus estimates.

In other words, the good news had been priced in. The market plunged instantly and never recovered. A trend down day took place with only minor rallies to work off oversold on the very short-term charts. That didn't stop the market from closing right on the lows. Carnage everywhere. The market spared very little today with the semiconductors, commodities and financials taking it on the chin.

There were other areas just crushed as well. Big cap technology leaders such as Apple Inc. (AAPL), Google Inc. (GOOG), Priceline.com Inc. (PCLN), and Baidu Inc. (BIDU) were annihilated. There was serious damage done to those leaders and this is very telling as they finally gave in to the selling. It took forever as they fought their negative divergences for literally months, grinding and grinding their way higher against the odds. The advance/decline line was ravaged at a rate of nearly 5-1. Volume was very strong.

Not a thing the bulls can take from today that says it wasn't as bad as it looked. There will be no adventures of play that spin doctor this evening. The bears got the job done today and shifted this market to neutral from a buy signal.

Why not a true sell signal yet?

Because the dirtiest of deeds hasn't being accomplished yet by the bears and that's to say bye-bye to the 50-day exponential moving averages. As we put a seal on this day, the market shifted and the bears gained some decent near term control. We have a clear change of character as the first important support level was taken out in seven months. More than just a tiny red flag.

Much to talk about but the question being thrown my way is now what? Is the bull market over? We know without doubt, 100%, that this market goes from bull to bear when we lose, and only when we lose the 50-day exponential averages. Here are the numbers that change daily and are still rising daily. Remember, the 20's are now going to trade down daily as long as we stay below it, but the 50's are still rising daily although only slightly now as we get closer to them.

Let's start by realizing that just about every bull market will test their 50-day exponential moving averages at some point when they get too overbought and those MACD’s just can't impulse up with price any longer. It's healthy and necessary in terms of unwinding the oscillators. I know today feels as bad as it can get but that doesn't mean that the bull market run is over.

I know. It would be so easy if Jack would just say it.

SAY IT!!!

No can do.

It all depends on how far up we bounce and how those oscillators impulse when we bounce off those 50-day exponential moving averages. Although nothing is impossible, if you think we're just going to melt down through those 50's, you're mistaken. They will hold on the first test. Almost guaranteed. As guaranteed as possible when dealing with the stock market. If the move up is reflexive, meaning weak and labored, then the story is likely being written. Buckle up for the next nasty bear market leg lower.

Today will look like candy compared to what will be coming if that's the case. All we can do is learn from the 50-day bounce that's coming. It'll give the necessary insight we will need to have in order to position ourselves for the next very strong move to come. That move being lower. Anything down from here to the 50's is meaningless as they'll hold as I just said. It's really about the next move up off of them. We'll have our answers in a few short weeks about whether the bull is a memory.

When we think of a healthy stock market, the first place you need to look is to those financial stocks which caused this whole mess in the first place. That and Alan Greenspan, the single worst fed Governor in history. Go buy no money down houses folks. Leverage yourselves. Go ahead and have a party. Save my hide and the economy, please. Don't worry about yourselves.

Anyway, those financial stocks took a licking today on gargantuan volume with the charts looking very bad, especially the ETF’s in that area. It won't take much more selling to open the flood gates lower as critical trend lines will be lost and there will be no immediate support to hold it up. The MACD's are pointing straight down and coming off what I'd call basically a triple negative divergence, not that the whole market doesn't have triple negative divergences. When those finally snap it can get bad fast. It doesn't mean it will, and remember, we'll be hitting those 50's soon, but over time, if they do break, the market will take it on the chin in a big way. The financials will offer a lot of evidence about the future soon enough.

Time to discuss those 50-day exponential moving averages and where the oscillators stand at this moment in time and thus why it's almost guaranteed we at least bounce off those 50's first before they would ever break down. The numbers to watch here are 1017 S&P 500, 2025 Nasdaq and 9408 Dow. Again, a quick reminder that they are changing and rising slightly daily.

There are other forms of support between today's closing prices and those 50's but they, in the end, are irrelevant. Only those 50's matter and folks, write them down. I'll update the levels every day. When they are gone, if they go away, the bull is gone and we can throw out the welcome mat to the bear market once again. As I like to say, it is what it is. Don't fight it if that happens. You won't be happy if you're long stocks below those 50's folks. I will only discuss how low things can ultimately get if we do indeed lose those 50's.

I could spend a great deal of time talking about tonight's charts but they're annotated and speak for themselves. They're not pretty. IT DOES NOT MEAN THE BULL IS OVER! It means things have changed and the bull is threatened. Perma bears will laugh at me and say you know the bull is dead Jack. Perma bulls will say thanks for the hope. Truth is it's unclear.

Today was damaging but we're still only testing towards the 50's and that is totally normal, even if it makes the market look like death. There is great danger here. That shouldn't be ignored. Again, listen up. If the bounce off the 50's is weak, buckle up. If it's powerful, you never know. Let the market be our teacher. Don't put you're beliefs ahead of what may ultimately be the final truth. Stay with your bias but be open to all possibilities.

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.

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