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Bin Laden...Jobs....Sentiment....Weekly's...Daily's......Down Week...Commodities Crushed....

Stock-Markets / Financial Markets 2011 May 07, 2011 - 07:43 AM GMT

By: Jack_Steiman

Stock-Markets

So much took place this week it's hard to keep up with it all. The week began with an eye sore. The weekly charts on the small caps, mid caps, Nasdaq, Dow, and S&P 500 all flashed nasty negative divergences. The daily charts were also showing negative divergences on the small and mid caps. The S&P 500, Dow, and Nasdaq had no negative divergences on their daily charts, which was a savior for this market. You don't want all the major indexes flashing negative divergences on both the daily and weekly charts.


The week started out poorly with the indexes moving lower off overbought conditions, which existed across the board on both the daily and weekly charts. The rest of the week was spent moving lower, except for today, which was up but off the highs. In between, so much took place that it needs to be discussed in full in terms of what it means to this market short-term. We had fantastic news on two fronts. First, from an emotional perspective and secondly, from a fundamental perspective. The emotional piece of the puzzle was the capture of Bin laden. Not only his capture, but his death at the hands of our Navy Seals. The news hit in the evening, and this caused a strong spike in our futures. The spike faded a bit heading into the open the next morning, which was somewhat surprising, although we still opened with a gap up. After a few attempts to move higher we failed and headed lower for the rest of the day finishing, basically, flat. It was a real shock that news, such as the death of this monster, would not bring about a rally to equities.

Then on Friday morning we had strong news on the employment report. I know it depends on how you look at it, so don't be too disturbed at my saying it was a good report. Job creation was much higher than expected, which gave the futures a real blast higher. We held the gap up, and blasted up, with the Dow up well over one hundred points. The only problem is, we closed below the open prints, and that's not what you'd expect from a great jobs report. You'd expect a gap and run, such as I did on the Bin Laden news. When markets stop gapping and running it tells you it's getting exhausted. It tells you the head winds I talked about are keeping the bulls down from breaking things out. All in all you can't be happy with the overall action this week if you're a bull considering how many pieces of strong market news we received.

Sentiment is a big drag on this market. It's a secondary indicator, but at extremes you know that over time it's going to have its effect on how the market moves. Upside action becomes far more difficult for the bulls whenever the bull-bear spread is over 35%. It was at 38.4% as of last Friday. It has now spent at least four weeks over this 35% level, and got a high as 41.6% at one point. This is just not good news for the bulls with regards to sustainable upside action. The overall market is bullish, but sentiment becomes a drag on things, and thus, causes more frustration. This is how sentiment finds a way to unwind itself back to appropriate levels where the bulls can launch things up from. As long as the bull-bear spread remains this high it'll be tough, especially the longer it drags out. The sooner we can unwind this headache the better off the bulls will be. The more weeks it's at too high of a spread the harder the pullback will be. There are subtle signs that this problem is working its way into the market place as evidenced by how tough it was for great news to move the market higher this week. There were other factors involved in making upside more difficult, but sentiment definitely played a role.

The worst of the pullback this week was felt by those ridiculously frothy commodity stocks. And what a bashing they took, especially if you play the iShares Silver Trust (SLV), and the iShares Barclays Aggregate Bond (AGG). They were down more than 200 points in five trading days going from high to low. Lots of careers ended this week because of the greed people have. The need to make a killing killed back. Volume was massive on that ETF right at the highs. Isn't it, sadly, always that way. The masses run in right when something tops. And because silver is a massive bubble, when it broke, it broke severely, as all bubbles ultimately do. If you study that AGG chart, notice how the volume spiked on the buying right at the top as it never had before. Something for all of you to remember when playing bubbles in the years and decades to come. Greed kills and so do these bubble ETFs. They got an oversold bounce today, but really haven't shown a true bottoming stick as of yet. They remain oversold and can bounce further, but they're all broken vehicles and very unlikely to go back into favor again. Be careful, but do what feels right to you, of course.

So we have bullish daily charts on the S&P 500, Dow, and Nasdaq, which could make down side action difficult for those who want immediate gratification on short plays. The daily charts will put a cap on upside action, but keep in mind that we have yet to take out the first important support at 1335 S&P 500. Gap, and just below the 20-day exponential moving average. If the S&P 500 loses 1335 then the bears have something they can get their arms around. They can then apply more force knowing most of the bulls are already in the market. 1323 is the 50-day exponential moving average, and that's what the bears have to take out if they're going to cause a problem for the bulls. They'll only get fearful if they see the 50-day exponential moving average go away. The 50-day exponential moving average on the Nasdaq is 2778, and that's what the bears will be gunning for over time. It won't come easy. Nothing on the downside will be easy simply because we're in a primary bull market. But again, with negative divergences on the weekly charts and poor sentiment figures here for the moment, the bears should start putting more pressure on this market. The S&P 500 has resistance at 1348, 1356, 1361, and then huge at 1370, the old highs.

One day at a time here. Upside will be more difficult for the short-term, but don't expect a crash because that's not coming. It's a process topping out from the current headaches we're facing. Slow and easy is the only way for now.
Enjoy life and spend time with a child if you get the chance. Also, do something nice for someone simply because you can.

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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