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Stock Market Sells Hard Early...Rallies Late..Nasdaq Green

Stock-Markets / Stock Markets 2010 Oct 28, 2010 - 03:47 AM GMT

By: Jack_Steiman

Stock-Markets

And this is what normally happens in markets that are trending higher. The Nasdaq, or higher risk stocks, usually do better and today was no exception. On a percentage basis the Nasdaq held up significantly better than the rest of the major sectors within the market. The market was due to sell some based on some overbought daily index charts. Lots of 70 RSI's out there. The doji on Monday was a predictor of some selling, although it took two days instead of one to get going. Not much selling yet though in the world of technology.


Overseas markets, especially Asia, were lower overnight, and thus, this market got the excuse it was looking for in order to finally sell off and unwind those overbought oscillators. We gapped down and started running hard almost immediately thereafter. The bears were rocking out of the gate. The bulls did little to fight back and that's understandable. Let it unwind they said. Well, it didn't exactly end that way did it!

The Nasdaq came roaring back and went green while the S&P 500 and Dow cut their losses quite dramatically. A furious rally late did the trick for the bulls as they fell over themselves it seems to buy the dip yet again. The bulls have to feel good about the close. The bears not so much. The trend continues overall to the up side.

Let's talk about sentiment. The market is hanging in there very well, yet this week's numbers showed an increase of a little more than 2% more bears than last weeks numbers did. It seems there is still the belief that this market is going to go down in a very big way. They've been wrong for a long time and will eventually get their wish. But the pessimism is hanging in there just enough to keep this market from becoming too complacent. That's all the bulls can ask. We're not overly bearish to the point where sentiment is a trade on the bullish side, but it is pessimistic enough to keep the market from getting frothy, and thus, ending the upside trade. A nice balance is in place and showing no signs of changing, which remains the best possible news for the bulls.

The semiconductors continue to rock along, which is very important for the bigger picture health of this market. The earnings have been stellar. Today we saw great moves in Novellus Systems, Inc. (NVLS), and especially Broadcom Corp. (BRCM), on their reports from last night. When the market was trying to hold on to gains I spoke at length about how it was essential the semiconductors and/or the financials get going to the up side or the gains will erode away soon enough.

Fortunately, the semiconductors have raced higher and are acting better by the day. The financials have yet to show this action, unfortunately, and it's understandable from a fundamental perspective. Maybe they'll never get going to where they fully participate, but for now, we at least have the semiconductors rocking along. This alone can keep things moving higher, although, how good would it be for the bulls if the financials finally got rolling.

Support is now up to S&P 500 1168, which is where the 20-day exponential moving average lives. There is price support at 1160, and then the big one, or the 50-day exponential moving average at 1143. Only if we lost 1143 would there be reason for any major concern. We hit trend line support today as well on the lows and this held the market up. 2434 is the 20-day exponential moving average on the Nasdaq while 2425 is strong gap support. Not until we lose that 2425 level do we have to worry about the 50-day exponential moving average currently at 2362 and rising daily. Only when we lose those 50's do we really have to start worrying. So far we're fine.
I'm being asked how do I, or anyone for that matter, know when the market is topping. There are two things I look for at tops besides divergences.

One would be to look to see how earnings are being handled. Are stocks being allowed to rise higher after running up pre-earnings? Is good news still being rewarded? So far, the answer to that is clearly yes.

The other would be to watch volume trends at the top and look for distribution by the big money out there. A great example of that would be the iShares Barclays 20+ Year Treasury Bond (TLT) as it was topping two months back. Huge down volume on down days and no volume on the up days. That's not great and that too is a red flag.

For now, neither of those two things exist although markets still sell from overbought, etc. I watch these things closely and for now there are no huge red flags that say go all cash. We are near overbought, or slightly overbought, still, anything can happen short-term. Pullbacks will continue to happen short-term, but the overall trend is still higher until proven otherwise.

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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