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Stock Market Goes Splat...

Stock-Markets / Stock Index Trading Feb 05, 2010 - 01:59 AM GMT

By: Jack_Steiman

Stock-Markets

Best Financial Markets Analysis ArticleThere are many words which could describe today's action but I think splat says it best. Clear, concise and to the point. It felt like splat for the bulls without question. The Nasdaq over the past three days wasn't very good but the Dow and S&P 500 printed some very nice candles with small inside sticks printed yesterday suggesting things would move higher today ahead of tomorrow's Jobs Report, which is huge to say the least. Instead, this morning we got bad news from many overseas company's about debt on their balance sheets. Headaches that are more than a bit serious. No liquidity. Not good.


The futures cratered down over night with the dollar soaring skyward. We gapped down and never looked back. The usual quick attempt back up early on but the bears jumped on this overseas opportunity. Down we went throughout the day. We stayed oversold on all the short-term charts. No real rally once things got rocking down. We closed on the lows. The Dow actually trading a hair below 10,000 before closing at 10,002. Volume was heavy enough but not capitulatory. Bad news for the bulls on that front. Bottom line is today was technically very damaging and I will discuss that shortly in this report. A total knockout by the bears.

We had our first breakdown out of a bear flag a week ago plus and from that point the market got oversold on the daily charts and started to move back up. As I had mentioned, some very good looking sticks on the S&P 500 and Dow charts. We closed just below those 20- and 50-day exponential moving averages and thus the battle lines were drawn. Would the bears take it back down or would the bulls bust us back through those lost moving averages? The bears said you are not getting back though those 20's and 50's and down we went. It's important to understand what this truly means.

For now it tells us that the first breakdown below the 20's and 50's had a follow through big time to the down side once it back tested. That's classic bearish action. You can't identify bearish action until you get a back test and how it's handled by both sides. The key here is not that the bulls failed on this back test. The real gem for the bears is how hard they sold things off with relative ease once we got this back test move. They left no doubt as to what their intentions were. They seized control and took the bulls down to their knees. The market is now truly broken. No question about that whatsoever. Can the market just spring back? No, not unless there's news out there that no one knows about at this time. We had breakdown, back test and massive failure. That's bearish. It doesn't mean bear market but it means the down trend is for real and thus we must all adapt to this reality or pay the price in a big way.

There's one chart and it's a big time leader in the financial world. Everyone should take a look at it tonight to show you the power of this move today and the implication it has for this market. MasterCard (MA) was slaughtered. The type of breakdown stick on massive volume that tells you it has seen its top for months, if not longer. Maybe lots longer. MA is just one of many stocks that look like this. CME Group (CME) joins that crowd. Google (GOOG) engulfed yesterday's nice move higher. The list is deep. The action in leader after leader tells me that this market will be struggling for some time to come.

The market has been no fun for many for over a decade now with many bear markets in that small time frame. I'm not saying we're in a bear although we could be. What I will say is that things will be very tough here. Quite difficult for the bulls. For those who cherish up, up and more up, those days are over for now. Global debt headaches are in control. The up trend is over. A down trend is in place. Adjust your investing accordingly. Again, I will remind you that this could last a long time or just some weeks to months. We can only take things one day at a time on that front. In this moment, the market is in a down trend confirmed.

Today's stick on the Dow and S&P 500 engulfed the entire move off the back test. MA, mentioned above, took out 3 1/2 months of gains in one day. These types of engulfing sticks are yet another reason to be protective of your investments here. Very scary sticks wiping out huge gains in a very short period of time. There is extreme risk in holding stocks in to their earnings reports. Keep that in mind. Engulfing sticks mean that one day at the very least took out the previous days gains if not many more days such as I just showed you. Engulfing sticks only usually occur when markets are confirming down trends and can do an incredible amount of damage in a very short period of time. They often take place on much heavier volume than when upside was being printed. Volume on these engulfing sticks confirms price action and on that front there is little doubt about these sticks being the real deal. Much heavier volume to the down side is what I'm seeing everywhere I look.

The dollar continued to explode higher today and that took the commodity stocks down hard. Very hard to be more accurate. When the PowerShares DB US Dollar Index Bullish (UUP) broke through 23.20, it too, back tested a few days ago but held that breakout and up it went taking the commodity world down with it. The market is following right along. Make no mistake though that the commodity world takes the biggest hit when the dollar rocks higher and the losses there are astonishing since the UUP broke out. It measures up to about 24.25 if the full pattern plays out.

Look folks, bottom line is that we're in a confirmed down trend. No one on planet earth knows how bad this will or won't get. All we know for sure is the down trend is confirmed now with these engulfing sticks today. It tells us to be staying away from longs. There will be very nice rallies that can be played only when the daily charts get 30 or likely even sub-30 RSI’s with stochastics below 10. At the same time the 60-minute charts will also need to show these types of grossly oversold readings. You'll get your 1-3 day moves higher off of these readings but you'll have to part ways quickly with any longs. We missed this intense move lower so now shorts will only come from higher oscillator readings. I won't short RSI’s in the low 30's such as we have now even though we can certainly go lower. Stochastics are just too low as well. Expect your bounces but now the top of today's gap downs are going to be massive resistance. On the SPY the level is 109.03. On the Nasdaq it's 2178. Just know that things are not good with the market and protect yourselves accordingly.

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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