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Stock Market Reversal Again At Support...Should Be Bullish Short Term....

Stock-Markets / Stock Markets 2010 Jul 31, 2010 - 07:03 AM

Yesterday we had a strong move down to support. We blew through 1099 and headed to the 50-day exponential moving average at 1093. It actually fell slightly below. We rallied as the day went on, but closed poorly. This allowed for another gap down today that was quite nasty, as we once again, tested the 50-day exponential moving average. This time we went a bit lower than yesterday as we traded to 1089. Getting too close for comfort when you think of how close we got to 1080, or the long term down trend line. It was do or die time for the market.

By the way, the market had gapped down today on a poor GDP number that was in line, but clearly the market wanted to see a surprise higher, and when it didn't get it the futures fell precipitously. Now, it was up the Chicago purchasing manager's report fifteen minutes in to the action. If this number was bad, it didn't look as if 1080 was going to hold. It came in better than expected and the rally off the lows was on.

The bulls let out a sigh of relief as that number saved the day. It was a number of hope. As the day ended, we were actually green across the board, something you would have thought impossible at the open. When the bell rang the bulls exhaled and can feel better about next week early on but not much beyond that. A strange victory for the bulls overall this week, but nothing to write home about. Today, they turned white with fear early on, but at least had their color back by day's end. A high anxiety day and week for the bulls, but they hung in there.

So let's examine what the two reversals on back to back days usually signals and why. First of all, it usually means the bears have had their run and used up a lot of energy doing so. This often brings about a short-term rally as the bears cover up, and wait for some higher prices before trying their luck at taking this market down once again. Two strong tests of 1080 is what the bears had in them, but they didn't have the necessary energy to take it below. The bulls fought and overwhelmed them when it counted on back to back days. Strong reversal candles on successive days, with the second day's late candle stronger than the first day's candle, almost always brings about a rally early the next trading day, or two, which is Monday and Tuesday.

No guarantee's ever in this game, but that's what we normally encounter. It would require some really bad news over the weekend to get this market to take, yet, another strong hit lower towards 1080. I don't think that's in the cards, and thus, being long, but not aggressively so, is the best way to play. Again, the fact that we reversed from critical support two days in a row, and with the second day being especially good, tells me we should rally a bit early next week.

Now, back to reality. The real world. The economy stinks overall. No strong bids that last. Nice action to hold where we are to be honest but we are not even able to get back to the most recent highs at 1131. It's a weak market for sure. Nothing to get excited about if you're longer-term bullish. The market is starting to doubt whether the good earnings will be repeated in the months ahead. It seems to think that it won't, but it also wants more data. It wants to see how employment looks next Friday. It will be trading more on economic reports than earnings now that the earnings season is about over.

Now, the truth will rule this market more than the fantasy of earnings reports. If the reports continue to show a decrease in economic activity, stocks will fall, thus we need to see the economy turn soon, or it's lights out mid-term for this market. With the market showing cracks, it would be best not to be too overly exposed in your longer-term portfolios until the economy can show some genuine strength. Just make sure you're not overly exposed unnecessarily. Be prudent. Take steps to protect yourself should things worsen from here.

My biggest fear down the road is that the President will give more stimulus to the economy. Print more dollars and chase good after bad. If that happens, and why wouldn't it with elections around the corner, it only delays the inevitable. You can only print so much before the house of cards comes crumbling down. It will delay what has to happen. You can't stop the ball already in motion, but you can unnecessarily delay it. Let things be what they have to be, and for once, put political concerns last. Won't happen. If we get more stimulus, it will prop the markets back up temporarily. And trust me, it will be temporary. The stimulus will be offered when Wall Street gets in deeper trouble. It's all about Wall Street. If it starts to tank out, the stimulus package is in the mail.

Bottom line is we should rally some early next week. Don't expect the moon and the stars, but you can expect some upside action overall. Nothing, and I mean nothing, will be easy for us, or anyone else playing this game. One day at a time. Slow and easy as always, with a safety first approach, to make sure no one gets hurt unnecessarily.

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.

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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