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Stock Market Reflex Bounce

Stock-Markets / Stock Markets 2011 Aug 13, 2011 - 07:28 AM GMT

By: Jack_Steiman

Stock-Markets

Nothing goes straight up forever. Although it seems to do that quite frequently. And nothing goes down forever, either. When we fall, we fall hard. But a 2100-point drop is quite a fall, and it happened in just a little over two weeks. It was time for a reflex bounce as the oscillators on the daily charts got very oversold. You could say, safely, that it was violently oversold, and although we've seen lower oscillators in past bear markets, this was enough for the first leg down in that process. The bounce was quite good this week as we went up roughly 8% off the lows. Not bad at all, but really not much more than a 30-35% retrace of the move down.


That is normal as it allows for unwinding of those oversold conditions. Remember that we saw RSI readings on a closing basis one time, and an intraday basis, a few days later at 15 on the S&P 500. That is more than a bit unusual. That last reading was on the day the fed spoke. It was enough of an excuse to buy the news, even though it wasn't really market friendly. Enough was enough. The week also saw a continuation of the amazing volatility intraday, day after day, due to the higher VIX readings that have existed for a while now. Whipsaw action that made everyone feel uneasy about playing for the very short-term. With the market having established a down trend for the moment, it is hard to get involved on the long side, even though it was due. If you had bought at the initial levels of oversold, or RSI, at 30, you would have gotten annihilated.

Again, it took RSI 15 to get things moving back up. That's just not good for the market in terms of getting that oversold. There has to be bad things going on to get that oversold, so playing counter trend for a bounce on this first move down made little sense. It's best to only play long if we retest, or make a new low and get positive divergences. So, the bottom line is we saw the week move up roughly 8% from low-to-high, but then struggled on Friday to get through strong gap resistance, which I will talk about later in this report. Cash is best during counter trend rallies, and thus, that continues to be our way of playing for now.

When you look at index chart after index chart, or even most regular stock chart after stock chart, one thing is clear, and that's the fact that most participated nicely in the move off the bottom. However, there are two sectors, and, basically, all the stocks within those sectors that simply have not performed on this move up off the lows. You know them very well by now.

The semiconductors, and especially, those financial and bank stocks, (Bank of America Corporation (BAC), JPMorgan Chase & Co. (JPM), Citigroup (C), American International Group, Inc. (AIG), just to mention a few.) continue to lag severely. They just can't bid and have lagged throughout this rally week. They are diseased, for lack of a better word, and simply can't get going. If they behave like this on the way up, one can only imagine what they'll look like if we back test 1100 S&P 500, which is likely, although, never a guarantee. The underperformance can be looked upon as an economically bad situation still to come.

Yes, it's been bad, but the fact that they can't bid even in a big up-week says things are likely to get a whole lot worse over time before getting better, and the semi stocks suggest the economy is just not moving along very well as the need for chips is falling, and likely will continue to fall. Whatever you do, it seems best to stay away from these two sectors. Do what feels best to you, but it makes little sense to me to be involved with them. Just about every other sector is better. Why not go other places if you have to be long side oriented.

A very interesting report came out today at 10 AM ET, a half hour into the trading day. It showed the lowest reading in 31 years. I had no idea, personally, that people think so poorly about their prospects in this economy, and about how they feel and think in regards to our leaders. People just don't see a very bright future for themselves. This includes the ability to hold onto their jobs, or their ability to get meaningful work, if they lose their current job. They think things won't be getting better any time soon, and have a total loss of confidence in the system. That's truly sad to me.

However, from an opposite point of view, one might say that such extreme levels of despair might mean the worst is behind us all. I'm not saying that's the case, at all, but you can't help but wonder if things have gotten so hopeless that maybe the worst is over, and things will hopefully start to improve in the months ahead. Of course, it may also mean that things are as bad as they seem, and maybe things won't be getting better any time soon. It is what it is, and for the moment, people feel badly about their lives, and that's just so sad.

So, the handle I thought would set up (bear flag) has done just that. The top now being 1188, and the bottom 1101. The top could extend out to as high as 1225, in my opinion, but for now, 1188 is the top of it. There's a tail off that level today, and now we watch for further tails near that area in the days ahead to determine whether that will definitely be the top. If it is, it's nothing bad, unless we break the old lows at 1101. If you establish a top, it doesn't mean instantaneous market death. You could just simply play around in that range for some time to come. No way to know other than you're watching the bottom to see if it holds, or doesn't. 1185 to 1200 is an open gap.

The market struggled mightily there today, but may not tomorrow. First test didn't make it, but it could also mean the market is topping out here. Only a little more time will tell the whole story. The boundaries are set for now. We watch 1185/1200 and 1101 with all else being nothing more than meaningless noise. The ultimate top for the bears must not exceed 1249. For the bulls, they must hold on to 1101. Interesting times.

Have a great weekend. Play a lot, especially with kids. You'll love life for it.

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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