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Stock Market Easy Times Gone...Tough Times Here...

Stock-Markets / Stock Markets 2010 May 06, 2010 - 02:10 AM GMT

By: Jack_Steiman

Stock-Markets

How nice it was to nail that bull market run off the February lows and ride it all the way up. Although it felt bad nearing the end of the run up in terms of buying in to overbought, we did, and things went very well. Easy times. Parabolic move higher. It was all fun. Then came 37.3% more bulls than bears. That level of sentiment started to smoke this market earlier this week and hasn't stopped. We're now 6% off the S&P 500 1220 highs. Seem like enough? It just about better be for the bears, but more on that later.


Now we're in tough times. We're trying to lose those 50-day exponential moving averages with some force although that hasn't taken place as of yet. Only about ½% below at oversold on the 60-minute charts thus it's not a clean break. Now the market becomes very difficult to trade as the market tries to set up a trading range within a handle, or worse, a breakdown below 1151. Still in a handle as long as we can hold 1151.

The chances for any appreciable upside are minimal due to the fact that we now have multiple gap downs in the pattern which makes things very difficult for the bulls to overcome. It's hard enough taking out one gap but taking out two close to each other in a pattern is extremely tough thus the title, tough times here. Nothing is going to be easy here and it may for quite an extended period of time. Be prepared for lots of patience. If not, my guess is you'll deal with more bad plays than you'd like.

1150 is both massive and horizontal support. Many tails fired off that level while also being important up trend line support. A strong combination of support that separates the bull from possibly something else. Possible because we have to see if divergences set up on a breakdown. Too early to know how things will play out, but 1150 S&P 500 should be pasted on to everyone's computer. It seems difficult to wrap our heads around such a potential quick change in the market trend but sentiment plays such a big role.
One fear I've talked about many times over the past several weeks before we started to sell was how long we were staying overbought. I mentioned that the longer we stay overbought the more difficult it'll be for this market once the rubber band does eventually snap, and it will have to at some point.

Bulls will get too full. That what's taking place now to the down side. The market was overbought too long. The bulls ruled over the bears for too long and too hard. Now the market pays the reaper. It would have been much healthier if we started to sell weeks before we actually did. The sentiment would only have reached the upper 20's in terms of bulls to bears. The numbers jumped the last few weeks and it was simply more than the market could handle. So we now get to watch to see whether the overbought stayed around too long, and if it causes this market to break critical support.

Short-term we are oversold. Longer-term time frames, such as the daily charts, are no longer overbought, but not yet oversold, and they may need to get quite oversold before trying to move higher. Once a market gets grossly overbought in terms of its oscillators such as MACD, RSI and stochastic's, it often takes more than neutral to get things moving back up. Not always, but quite frequently, it takes oversold to get rocking back up, meaning RSI's near or below 30 and stochastic's near or below 20/10. Stochastic's are now in the 20's with RSI's in the 40's so we have had decent unwinding, but I get the sense we'll need to get lower over time before we bottom out short-term for a while.

There is only one way to play this market now. Mostly cash!! Shorting is difficult, even if we lose 1150 by a bit, because if we do, we'll be very oversold on the short-term time frame charts, and just about, if not, oversold on the daily charts. It could very well be a head fake below critical support. With so many gap downs in the pattern now, it will also be very difficult to gain some extended upside action. With 1185 S&P 500 now a gap down for today, this level will act as resistance if we happen to get any bounce back up short-term. The market can now be defined as 1150/1185. Which ever breaks first will be very telling. For now, it's best to remain cash for the foreseeable future.

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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