Stock Market Testing the 20's... 50's On Deck....

By: Jack_Steiman

When the S&P 500 made its measurement at 1220, I had warned quite awhile ago, likely several weeks, possibly a couple of months, that the market would struggle with appreciable upside action. The measurement, once made, is usually reason alone for a long rest with more down side action than up side action. However, when massively overbought daily charts are added to the equation, there's enough reason to now bring the markets lower for a while in order to rest. To unwind those massively overbought oscillators. It's healthy and quite necessary. You can only get so overbought for so long before the rubber band snaps and brings things back down.

Before the selling is over it would be great to see all stochastic's on the daily index charts get to oversold levels, meaning 20 or lower, the RSI's get to 50 and hopefully lower, and the MACD's get to the zero line or lower. The more oversold the better. This is how the market can then try to go appreciably higher once again. Any upside from here would be contained to small gains simply because we haven't gotten those oscillators unwound enough. The more we sell, or keep the trend lower for a while, the better it'll be for the market bigger picture. If you want higher markets then rout for this market to struggle for a while longer. It should.

Today we saw the type of market associated with a market ready to move lower, or at the very least, struggle with much upside action. It gapped up higher due to the 60-charts being oversold. Some quite a bit so. The market tried numerous times to make a big run up. It was moving up off the gap up opening. This is normally associated with a market ready to go higher and higher. Not to be this time, however.

The market ran out of steam pretty quickly and then spent the rest of the day slowly giving up the gains with the Nasdaq actually going red at the end of the day, basically closing on its lows. The theme here being early morning strength is being sold off as the day moves along and then we eventually close to, or very near, the lows. This is a change of character from what we've been seeing the past several months. Good news not being bought up such as the good retail sales report this morning pre-market. Late selling is a clear change of how things have been going. This tells us that we're going to struggle for some time to come. Nothing necessarily horrific, but definitely not the action that supports higher prices overall. Rather, it tells us we should drift lower over the next few weeks.

It's very normal, once markets have topped for the reasons I've discussed in this letter earlier on, for all the major indexes to back test their 50-day exponential moving averages. This allows for the unwinding we're all looking for. The first part of this process is to challenge those 20-day exponential moving averages. You bounce around this level for some days, but eventually break below on a closing basis and test down to those 50-day exponential moving averages, or at least very close to it. Sometimes you fall a little short of getting there. Sometimes you test perfectly. Then there are other times when you are mentally tested when the 50's actually get breached to the down side. That's the more emotional of the scenarios. Hard to say which will play out, but none of that really matters in the end. Just be aware that some form of this test is likely to happen in the days and weeks ahead.

The 20-day exponential moving average on the S&P 500, Dow and Nasdaq are at 1196, 11,204 and 2515. On the close today, the Dow breached by a few points, which is truly meaningless, and the Nasdaq closed below by two points, which also is non-confirming. A close one percent below is more indicative of a true breach and loss of these levels but we have a start. There could be a small bounce off these levels, but sooner or later a test down to the 50's is likely, and those levels are at 1168 on the S&P 500, 2436 on the Nasdaq and 10,986 on the Dow. The Nasdaq is the strongest of the indexes with the S&P 500 a close second. The Dow is the weakest by far. When the market is ready for more upside down the road, the Nasdaq should lead once again.

The market simply needs time folks. Let's not give away hard earned gains by over playing our hand here. Let's not get aggressive on either side of the trade for now. It's time to be playing much lighter than we have over the past several months. Just go slow for now and allow things to set up all over again down the road. Some weeks from now. Just go slow and easy here.

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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