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Trin Rocks The Stock Market Higher

Stock-Markets / Stock Markets 2010 Nov 25, 2010 - 06:49 AM GMT

By: Jack_Steiman

Stock-Markets

The trin is a way of measuring very short-term sentiment. Whenever it hits levels of 2.0, or higher, it almost guarantee's a rally of some magnitude the very next day. Yesterday I mentioned in the final update how we were seeing a print of 2.94, and should expect a good day today. That's what we got fortunately. Our stocks were lucky enough to perform quite well today, which gives us a little breathing room as we await the markets next intentions.


Why is this so important?

Because we're three points away on the S&P 500 from that breakout at 1201 on a closing basis. 1200 is a wall of resistance that the bears want to defend at all costs. If that level gets taken out on a closing basis they will be forced to cover, thus, allowing the S&P 500 to climb higher. Possibly even test as high as 1228, the old highs just made three weeks ago. This would likely set up that larger symmetrical triangle I talked about. However, let's not put the cart before the horse just yet.

Today's success doesn't guarantee we make this move above S&P 500 1200. We could simply fail right here, but things are set up pretty nicely on those daily charts that, so far, have only pulled back to neutrality and have not yet approached oversold, which seems like the more appropriate trade. But that's not what I worry about. I play what I see and just because we may break above S&P 500 1200 now doesn't mean we don't go down again once it tops out near 1220 or so.

The massive pessimistic trade yesterday opens the door to a possible breakout on the S&P 500 above 1200, and if that's what happens we can add a little exposure above and beyond what we're already holding. Once again, this market proving that some exposure to the long side is a necessary evil until we some day get a real sell signal on the key oscillators. Friday and Monday will be more than interesting.

Here's the good news from today's trading. Not only did the market hold those 50-day exponential moving averages, they blasted through the 20-day exponential moving average on a gap up today. A gap up that held and ran throughout the day. Now the bulls have this gap above those key 20-day moving averages to help them deal with near-term selling.

If the market had opened flat today and rallied that would have been fine, but when you climb back above critical resistance such as the 20-day moving average is, it adds to the bullish case of just how strong the overall market is. The work just got more difficult for the bears in terms of them taking over the 50-day exponential moving averages on the daily index charts. Now they have work back down through the 20-day moving averages first once again. Not an easy road ahead for the bears.

When a market gaps up above major resistance you want to see what type of candle stick gets printed at the end of the day. Will it be a black filled candle meaning on balance sellers? Will it be a clear black candle suggesting a continuation of the move over that important resistance? The type of candle printed is huge. We see that today's open barely cleared those 20-day moving averages but then decided that wasn't going to be all. It was going to keep running higher thus protecting the gap up.

This would force some short covering. The fact that we closed on the highs suggests that today's gap up means more than usual. It tells the bears that the bulls are going to try and force their hand and take this over 1200 shortly. Never a guarantee, but that's what today's candle tells me. A full, clear, black candle off the gap up. Solid action for those bulls.

Let me discuss quickly the key sell signals that tells me a true top has been made in the stock market. Number one is major negative divergences on the daily charts at new highs. If this happens it tells me that the end is close at hand. This type of set-up often means the top has made for months, if not years, to come. It has to be the right type of divergence, but that's for a class some day.

The second, this is watching for distribution volume at the top on down days with light volume on the up side days. Lastly, I look for great earnings reports to be sold instead of them rewarded such as they are now. When a stock reports well and guides higher they're getting large boosts higher, and thus, it's still a market positive. The other sell signal is shorter in nature and that's the sentiment sell signal which has been the cause of this move off the top.

The other mentioned are longer-term sell signals. For now we're still only on a sentiment sell signal. The numbers are still at 34% coming in to this week, but yesterday's trin reading tells me it has dropped off that lofty 34% level, but it's still too elevated for the moment. Sentiment signals are tough to time, and we have had a strong move off the top, but we can climb higher again before it kicks in harder. The overall market remains on a buy signal for now bigger picture.

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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