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Stock Market Selling Accelerates...

Stock-Markets / Stock Markets 2011 Mar 17, 2011 - 04:14 AM GMT

By: Jack_Steiman

Stock-Markets

What a day we had today. Down in the morning before rallying back with the Nasdaq, actually going green for a brief moment before the European Union's energy chief made a comment about the Japan nuclear situation, which sent the market exploding downward. The Dow went from -40 to -200 in moments. Eventually, it almost went to -300 before rallying back to -130. It slipped again late finishing down 242 points. Down 50 plus on the Nasdaq and 25 plus on the S&P 500. Very nasty action with wild swings as the VIX has spiked, and thus, large swings were taking place all day long, although most of the swings are clearly lower. Larger swings do create more emotion, so it's best to keep things light on both sides as you'll get head faked time after time. Just better to keep things light to mostly, if not all, cash.


Once we gapped down we saw some flight to safety as the put-call on the index side was flashing levels at slightly above 3.0. Extremes for sure as the masses are fearful, and looking for protection in case the market crashes out. This is good news for the bull's bigger picture as it shows a high level of bearishness starting to come in. That's what it'll take in order for the market to find a bottom down the road. We did see some nice moves up once these extreme levels were hit early on, but the bad news out of Japan won the day. Just too much fear for now and that's why we saw selling late as few are anxious to hold overnight. With the poor close we are getting oversold on the short-term charts. We could see a bounce at any time due to these oversold conditions, but that does not mean the selling has finished. Recognize the need to not get caught up in a rally that takes place from oversold 60-minute charts. If you want to chase that it's your call, of course, but it's not the safest, nor the best, way to play the stock market. Let things work themselves out for a while. Patience is best here.

I don't think anyone out there would argue with this one basic fact. If you want the best stock in the world, just put in the Apple Inc. (AAPL). It's number one in everyone's heart. It seemed to me that the best way to create fear is to take the number one stock on the planet and break it down below the 50-day exponential moving average. Today was that day as it soared below its 50's on its way to being down 15$. It's biggest losing day in quite some time. Losing its 50's creates a lot of fear. Fear equals lower prices which equals a bottom. Without fear we can't get the selling needed to build back the wall of worry. The deeper this baby falls the better off the market will be for it. It will go lower still, but with bounces, of course, along the way. Apple has not seen its ultimate bottom on this pullback in the market. Good to see Apple crack today. It will go a long way to helping the market find a bottom a ways out from here.

When we go back and study the daily and weekly charts hind sight makes it easy, but let's study it anyway. If you noticed, the daily charts stayed overbought for a very long time with RSI readings getting well above 70. We all kept wondering what it would take for this market to start a long awaited pullback to unwind those lofty readings. Day after day the market would grind higher. It seemed as if it would never stop. Then we looked at the weekly charts on the major indexes. That ultimately told the story. They were working their way towards overbought, but their RSI readings hadn't hit 70 yet. When that magical moment did occur, it took but a very short period of time before the whole market gave it up. It took the daily and weekly charts to print a 70 RSI before this market gave it up. Very often it only takes 70 RSI on the daily charts before things rock lower, but in this intense bull market we needed confirmation from the weekly charts before we saw the market top out. Interesting, to be sure.

It now appears that the daily charts will need to print sub-30 RSI's before they are ready to make their bottoms. How great an opportunity that will be in time if we're all patient enough. Stochastic's will also likely have to print sub-10 readings if not sub-5. The lower the better is how I see it. MACD's will have to sink further below 0. But they're already somewhat below 0 with more work to be done. Fear is ramping now with more needed, but make no mistake about it, the oscillators are getting it done. When we bottom it probably won't be an immediate rush up. Rather slow at first, then it'll accelerate. But again, that's not upon us yet, so let's not worry too much about it. I'd rather spend my time trying hard to find the bottom of this market as close as humanly possible. Today's low at 1249 is support, as is 1225, and then 1200. Step-by-step we'll go lower.

Here's the hard part. When it's time to buy it will feel ugly, and you'll say, no way am I buying here. I can fully understand that. It won't be easy to buy the kind of weakness we've been seeing and what's still to come. You don't have to participate if it feels too difficult. Do what feels right, but when I feel that it's time, even if I am a bit early, I will put out plays for sure. The best plays are the ones you buy close to their lows rather than chasing much higher over time simply because you suddenly get the nerves to move in. We're not at that time yet. Relax. Let's watch how things unfold over the coming days and weeks.

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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