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Rough Few Days For The Stock Market Bulls....

Stock-Markets / Stock Markets 2011 Feb 24, 2011 - 03:31 AM GMT

By: Jack_Steiman

Stock-Markets

Markets tend to catch the masses off guard. It's an old story with the stock market. The bull-bear spread has stayed quite high, and actually increasing in the number of bulls, and decreasing in the number of bears over the past few weeks. More and more are getting bullish which explains how the weekly charts got so extremely overbought, especially on the S&P 500 and Dow. High-70 readings on the Dow, and mid-70 readings on the SPX said it was time to reign it in some.


There was trouble over the weekend in Middle East. This was the excuse, or catalyst, to get those overbought oscillators to unwind lower and allow for some decent selling. Our stock market had been grinding up for quite some time with tiny candle sticks that way day after day.That's the first red flag indicating a pullback isn't too far down the road. Poor MACD's, along with not so great looking RSI's and stochastics, were also red flags to start removing long positions late last week.

All of this led to a big gap down yesterday that tried to come back early on today, but was rejected by the bears. The bulls finally saw it wasn't coming back, thus, a long squeeze was on. Nasdaq fell nearly 80 points in a day as the big caps were slaughtered. The market followed through today, but got grossly oversold on the 60-minute charts, which allowed the indexes to close off the lows. Some stocks, such as Netflix, Inc. (NFLX), Priceline.com Incorporated (PCLN), Research In Motion Ltd. (RIMM), and others took it on the chin again, however. Ugly sticks over the past few days, which saw stocks take out many weeks of gains, if not months, in just those couple of days. Many also lost their 50-day exponential moving averages.

When things give it up, they can do so quickly, and it can take the human brain from complacency to fear very rapidly. That's what causes the long squeeze. Bottom line is, things aren't great for the short-term and there will be lots of bounces, but the near-term trend overall will be somewhat lower.

Only when we lose the 50-day exponential moving averages on the major index charts can the bears get happy for real. This is all just a gnat of selling thus far. Nothing from nothing, really, bigger picture. Sure, some stocks are really crushed, but the overall market hasn't seen anything worth talking about. Just a few percent down off the top. Only if the 50-day exponential moving averages get taken out with force can the bears say we have a genuine selling period we can feel surer about. Until that happens they've accomplished nothing to be blunt. A start for sure, but if they want to see a 10% or more correction, they will need to remove those 50-day exponential moving averages, and then the selling will kick in big time. I'll go over those numbers later on in this report.

Everything has to start somewhere, and the fact that the bears have a nice huge gap to work with on the index charts and on many leading stock charts, they can feel there's hope, after all, for some gains on the short side. It won't be easy getting back through these large open gaps, so the job should be a bit easier to get selling when needed. Bottom line is, the bears have gotten the ball rolling. They must now remove those 50's, and then they have something they can brag about. Until then it's just meaningless selling from overbought.

The key element to understanding a real pullback is whether selling is across the board or not. The market has seen money rotate around that has not allowed for much selling. We're seeing a change of character on that front now. Money has stopped rotating the past several days, which is allowing for more intense selling across the board. It seems as if the big money has decided now is the time to let things unwind for a few weeks, and that would allow for a much better buying opportunity.

Market needs periods of longer-term unwinding of its oscillators if it's ever going to move appreciably higher once again. RSI's can't stay above 70 on the daily and weekly charts forever. It's healthy and necessary to get deeper selling for some weeks. It's no different this time on that front. Notice how long we've been grinding higher. Not good. The deeper we sell over the coming weeks the better off we'll all be for the bigger picture bull. If the selling stops suddenly we'll be overbought in no time once again. For now, the market is following the type of script that has led to stronger periods of selling. As long as we don't see real rotation then the selling will continue for a while longer, even if the oil, gold, and silver stocks keep rocking due to the problems overseas.

Critical long-term support comes in at those 50-day exponential moving averages. On the Nasdaq it's at 2715, where there is also strong support on gap. If the Nasdaq loses 2715 with force the selling will really accelerate. It tried to lose that today, but we were too oversold with 10 RSI's on the Nasdaq 60-minute chart, thus, no success today there for the bears. That's the number to watch for in the days and weeks ahead.

2715 is critical for the Nasdaq bulls to hold. On the S&P 500 the level is further away. 1286 is that number, and we're still quite a ways away. You really need to understand, folks, that unless those 50's get taken out, the bears have accomplished nothing worth talking about. They will work hard in the coming days and weeks to get things accomplished on that front. The Nasdaq would be the first to go if things keep as they, and I, expect them to remain as they are, because the highest froth stocks get taken out first, which are clearly the Nasdaq stocks. The world of no reality lives in the Nasdaq, thus, that's where the bears will look to attack.

The market has started to sell, but nothing has really been accomplished. Selling through critical support is never easy in a bigger picture up trend, but many leading stocks have lost those big time 50-day exponential moving averages. First leading stocks go as they are doing now, and then, ultimately, the indexes go as well. The bears have gotten some of the job done but not all of it. A day at a time folks. Markets are oversold on the short-term charts, thus, as usual, the job won't be easy for the bears, but we do see a change in character for this market, thus, be VERY CAREFUL out there for now.

Cash is a position and where we need to be for the moment.

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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