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Bears Trying to Break the Stocks Bull Market

Stock-Markets / Stock Index Trading Oct 27, 2009 - 01:02 AM GMT

By: Jack_Steiman

Stock-Markets

Not exactly blowing the bull's house down but trying. A start. They were successful in at least taking the S&P 500 below 1074, and they did it without a gap down, although, that is actually the weakest way to do it because there's no wall of resistance directly above. However, props to the bears for finally getting things going their way. The bulls now have to find the right tonic of news, and fast, to get this market back over the 20-day exponential moving averages and above the S&P 500 gap or they're toast for a while. A gap down tomorrow morning would put a nail in the coffin of the bulls for at least the near term. A loss of support today followed by a gap down that holds tomorrow and it'll be a short all rallies market. The bears are now more in control than the bulls so set up your trades that way.


The bulls tried to hold the line today with another small gap up and run. It didn't work. The PowerShares DB US Dollar Index Bullish (UUP) was lower early on thus the rally higher but that too didn't last long. It shot back up quite suddenly and the reversal in stocks was under way. The UUP strengthened slowly but surely most of the day allowing the bears to seize on S&P 500 1074. I've never seen a market so controlled by one single issue, but you can draw up where the market is going seemingly by every tick on the UUP. Once the UUP went from red to green the market went from green to red with commodity and bank stocks leading lower.

The bank stocks broke down today and that's a huge negative for the market. In addition, on some earnings reports, we are losing some stocks that were helping to keep this market up. For those of you who wonder why I don't hold stocks in to earnings reports, Baidu, Inc. (BIDU), is down $58 after hours. Yes, I said that right, $58!!!! How is that for pain. This is a take the gains and run market. Never hold on to earnings. We have lost some big wigs such as Research In Motion Limited (RIMM), Union Pacific Corp (UNP), Burlington Northern Sante Fe Corp. (BNI), and Baidu, Inc. (BIDU) to name a few. When the banks break it can't be good news for the S&P 500 thus the loss of 1074 today seems like one that should last for some time. With the dollar looking to rally now, we should expect the whole market to struggle a bit more. Just not a great time to be in stocks.

9653 Dow, 1046 S&P 500 and 2082 Nasdaq are the numbers for the 50-day exponential moving average. If the indexes lose those levels, we basically switch from bull to bear market. We aren't there and if we get there, and there's a good chance we will, those levels should provide, at the very least, a bounce. This is test number two, however, so the bounce isn't guaranteed to be nearly the magnitude the first bounce was. If it's weak and labored then we have to start raising those red flags very high that the good times may be basically over for quite some time. Resistance at 1101 S&P 500 should not be seen for quite some time.

We still have strong negative divergences. One peek at the Dow daily chart and you can see four consecutive highs in price and four consecutive lower MACD's. The piper may be coming to collect. You have to pay sooner or later. No guarantee's but that time seems to be upon us. The process isn't going to be super fast so don't expect a market crash. Its slow step by slow step but strength now seems like a good shorting situation. With the oscillators still high on those daily charts in conjunction with those negative divergences, we should see all rallies die off pretty fast for now. (See charts below: WLSH, SPX, NYA, INDU, SPY, BKX)

The market seems to be in transition so we need to go along very carefully. Use strength to buy appropriate shorts and to lighten up if you have too many longs. The transition is not complete until those 50-day exponential moving averages go away, so for now we think of the market as one that's in correction with the possibility that the longer term top is in for some time. Possibly a very long time.

We take this slowly and day by day.

Please adjust to what's taking place.

Peace

Jack

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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