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Stock Market Testing the 200 day Exponential Moving Averages

Stock-Markets / Stock Markets 2010 Feb 07, 2010 - 02:31 AM GMT

By: Jack_Steiman

Stock-Markets

Best Financial Markets Analysis ArticleThe market has come down a long way in a fairly short period of time. It wasn't too long ago that the S&P 500 printed 1151. Intra-day yesterday we hit 1044 on the S&P 500 or a drop of 107 points or roughly 9.5%. A very decent drop and can clearly be called a correction although it falls technically about 1/2% below. 9.5% is close enough to say we just went through a correction. The market has purged and now it's time for a little break from the down side action. It's taken enough Pepto Bismol to where it can have at least a tiny vacation. How long is unclear and I'll cover the whole scenario in this report.


Markets don't go straight down but the S&P 500 has led down hard enough to be the very first critical index to touch its 200-day exponential moving average at 1046. It actually printed down to 1044 yesterday and was on the verge of a bear market. The short-term time frame charts were oversold and so basically were the daily charts although not as intensely so. In addition, it's very normal for traders to buy up the first test of the 200-day exponential moving average once it’s already lost the 20- and 50-day exponential moving averages.

Combining oversold and the first time down to the 200's equaled a bounce that looks to have a little more left in it. It will encounter some very difficult resistance just 2% away so it's not time to get overly happy about this important save at the 200's. A retest of the 200's with a positive divergence on the daily charts would be the all in signal. We should have at least another test once the upcoming bounce is complete.

Let's take a look at the critical areas of resistance each important index will be facing on any upward thrust higher in the coming days. The S&P 500 closed at 1066. There is a major gap at 1092 from Thursday on heavy volume that will be more than tough to get through initially at least. In addition, we find the falling 20- and 50-day exponential moving averages at 1100/1103 respectively. Very tough sledding ahead if we can first move up 2% or so. The Dow closed at 10,012. 10285 is where we find the 20-day exponential moving average and 10314 is where we find the 50-day exponential moving average. Again, 2% or a drop more before running hard in to resistance.

Finally, the Nasdaq. It closed at 2141. There's a major gap at 2178. 2209/2212 is where we find the 20/50 day exponential moving averages. So yes, the market can find upside here if it wants it but it is quite limited short-term. If things set up favorably on a test back down after a rise here, we can see a much stronger move higher take place. For now we have to recognize that things aren't favorable for a massive move higher but there is definitely room for some decent upside short-term before running in to a wall of resistance.

The bounce up in the market also correlates directly with the PowerShares US DB Index Bullish (UUP) or the action in the dollar. As the S&P 500 was testing its 200 day exponential moving average, the UUP was blasting higher to where the RSI reached the mid 70's, That is not sustainable as we know and thus it was time for the dollar to get an overbought pullback. As that ensued the market rallied behind some decent late in the commodity and financial stocks.

With the UUP still clearly on breakout and simply unwinding overbought, it is very premature with regards about getting too excited with equities. The UUP breakout is very strong with the pattern continuing to act in a bullish fashion. Nothing long term here if you're buying. Maybe down the road and that's the hope here but that's not what you should be doing right now. In fact, we have the CRB or Commodity Weekly Chart for your viewing this weekend and you can see the nasty breakdown that has taken place due to the explosion in the UUP or dollar chart.

It is possible that were setting up in a new channel that will have us trading between the 20/50 day exponential moving averages at the top and the 200-day exponential moving average at the bottom. The best chance this market has in terms of a strong advance in the future is for a move up here that gets sold at resistance just spoken about and then it heads back down decently and we create a positive divergence on the daily charts.

That would be exciting for those who love to be or who are bullish. If the market turns back down but we fail to get a strong divergence we could be in deep trouble. it is very unclear as we'll only know once we turn back down and see how the oscillators respond. Bad corrections test the 200's folks but if it's only a correction then the 200's MUST hold bigger picture. We would need to break back over the 20- and 50-day exponential moving averages to get back in good shape technically. Let's see how far we can move up first. Can we even get to the gap breakdown level or not? It's how we ultimately go back down that will tell the bigger picture story.

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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