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Stock Market Back Testing The 20's...Daily's Still Oversold...

Stock-Markets / Stock Index Trading Oct 06, 2009 - 01:18 AM GMT

By: Jack_Steiman

Stock-Markets

I had talked about the likelihood of a bounce as we got to the 50-day exponential moving averages on the daily charts. Yes, it was possible to just blow through those 50's but with the market trading above them for the past three months without a test of any kind, it was extremely unlikely that we'd just break down and through that level.


We got close but today saw the bounce on lower volume. The thoughts here are about whether this was just a bounce of those 50's or was it a typical test that needs to occur in order to unwind overbought oscillators and rid the market of strong negative divergences on those daily charts. The market has clearly unwound off overbought and some of those divergences are being wiped out gradually.

That's the good news. There's bad news.

The leaders, Apple Inc. (AAPL), Google Inc. (GOOG), and the like, still have terrible divergences on their daily charts that may somehow work themselves out without too much market damage but they don't look very good. In addition to that, the volume on the way down off the top was very heavy with terrible advance/decline lines. These things alone do not say all is lost. It's just something to note and keep in the back of our minds.

In many respects you'd expect all of that as the market needed to sell thus there's nothing wrong with some extra volume as long as the market actually never did break down and that's the case here. We came close to breaking, but obviously those 50-day exponential moving averages have held on the daily charts. I won't totally dismiss the volume though. It is something to keep an eye on and watch.

The market had a small gap up today even though Asia wasn't very good, and you can add Europe in to that mix. Neither one was awful, but after a lot of action lower recently, they weren't exactly moving up and out as we would have hoped.

The futures held gains throughout the morning and after that slight move higher, and after some back and forth action, the market did what a 50-day first test at oversold should do and that's trend it's way higher. We closed just off the highs for the day and just below the 1043.80 20-day exponential moving average on the S&P 500, but the action was positive overall.

Volume was light but the advance/decline line was spectacular. 2.5 to 1 positive on the Nasdaq and over 4 to 1 positive on the NYSE. A real interest across the board and how convenient that Goldman Sachs (GS) upgraded the whole banking sector at such close levels of major support. Juiced up financials make it very difficult for appreciable down side action. When the bears recognized that they wouldn't get much satisfaction for the day, they took the foot off the gas and allowed the market to move up on light volume.

So far the S&P 500 Depository Receipts (SPY) is showing favorable action off our 50 MA Test on Friday which printed a Hollow Candle. We'll see if we can get back through our 20 EMA on this move.

Solid action on this recovery day but it's meaningless unless we can clear back through those 20's on the daily charts. We're close but no cigar at this point. A good start only.

There is an interesting dynamic going on here. Let's start with the 60 minute charts. If we move back down, there is no question that we'll print massive positive divergences. On the other hand, when looking at the daily charts, they remain buried with stochastics still down at the bottom.

However, the MACD's, on any move up in the market, will likely print yet another negative divergence. That's not etched in stone but likely. What this means is that it'll be next to impossible to break this market down in the short term, say some days to weeks.

Beyond that, we will need to watch those daily charts very closely to see if they'll give further insight as to what to expect from further market upside. The bulls, for now, should not worry about breaking down here. beyond that, they still need to keep those red flags up. Nothing aggressive longer term here.

We are now, at this moment in time, trading between the 20 and 50-day exponential moving averages. Let me give you those updated numbers that's change ever so slightly each and every day. The S&P 500 numbers are 1018/1043. For the Nasdaq they are 2027/2084 and for those who care about the Dow, those levels are 9417/9626.

The lower numbers being the 50's and the higher numbers being the 20's. It can take days to truly firm up, so even if we don't clear back through the 20's right away, as long as those 50's hold, the 20's can go in time. Don't be impatient with a process. This market is still in a bull market trend until we lose the 50's folks and don't forget it. Technology and the financials will need to lead us higher. I don't really like the look of the technology leaders, but I've seen them pull off miracles before.

Let's just remain open to all that's possible and not overplay until we truly have a clear picture of how things are setting up. Don't be too bearish, please, until the market tells us it's safe to do so. Some of your emails tell me that there's an anxiousness about being bearish but that's just not appropriate at this time.

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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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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