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Stock Market Counter Trend Still Rocking.....Not Necessarily Bullish....

Stock-Markets / Stock Markets 2011 Aug 16, 2011 - 03:50 AM GMT

By: Jack_Steiman

Stock-Markets

Text book market back test under way off the lows, which I've talked about. It's normal market behavior to test back up once you get a massive breakdown such as we've gotten. The oscillators got violently oversold. Oversold at levels rarely, if ever, seen on the daily charts. It certainly makes you take notice, since it begs the question, why did things get this bad? We don't have to understand it, but we do have to recognize that the market didn't like what it saw. We went down 2200 on the Dow, and have since retraced 900 of those points. It could go higher still. That doesn't necessarily mean things are bullish now. Not at all. Only a clean blow through 1249 would change that thesis, and I don't think we'll be seeing that any time soon.


The daily RSI's, which were at 15, are now nearing the mid 40's, while the 60-minute charts have those RSI readings back into the mid 60's. It's impossible to say just how much more we'll be on this back test, but 1230 is the 20-day exponential moving average with 1249 the breakdown area. It could go that high, but even that is no guarantee. Could fail a bit below those levels, or even breach slightly above, but I think it'll be extremely tough to get this market above 1249 S&P 500 with force any time in the near future. It would take extraordinary news to make that a reality. Keep in mind that as good as this move has looked we're not really all that close to the breakdown levels yet. Still 4% away on the SPX.

The volume trends and the advance decline line, along with the size of the candlesticks, have not been as impressive on the way up as they were on the way down, but again, that's not a recipe for an instant reversal back down. We could go up another 4%, or so, first. It just tells us that the bears have steeped aside a bit from the massively oversold conditions created on this very impressive leg down. While things have improved somewhat for the bulls, the bears are still in control of things, and that shouldn't be lost in the price action going on. It's easy to get too bullish too fast. I respect that emotionally, but I think the market has more work to do to the down side before we get a more sustained upside move.

You have to wonder just how far this market can go to the up side when you get news, such as the one we just got from the New York State Empire report. It showed economic activity in the most active state in the country is slowing rapidly. The numbers are actually negative, and well below expectations, which were supposed to be slightly positive. There's only so far a counter trend rally can go when these things take place. Activity needs to show expansion, not contraction. Markets can have their heads down when they need to rally from oversold, but there's a limit to how far things will rock up when important economic reports come in so poorly in important areas of the nation. If it's bad in the center of the action, how good can it be around the edges! Not likely to be very good at all, so, I remain more on the bearish side of things until economic activity shows a real jump up where it counts the most.

It's been an interesting year thus far. There has been lots of bad news up to this point on so many fronts. It's almost too many to count. Europe has battled terrible economic news just about everywhere. So has Asia. And we all know the headaches we're facing in this country. There have been defaults. There have been riots. There has been a near default in this country with our elected leaders acting like three-year-olds. We have been downgraded. We have seen foreclosures move higher. We have seen poor employment numbers. On and on it go. The result? The S&P 500 is down 5% this year. That's it.

I don't care that at one time it was down 14% plus. It's only down 5% now, and our Government, in times of great despair, is on vacation. Amazing strength in the face of this nonsense. Now we know why the bears are frustrated more often, by far, than the bulls. It takes horrendous news to get bears rocking for a small window of time, while it takes almost no good news at all to keep markets going higher. Markets almost always go higher, even if they go nowhere over time. Just avoid the bear markets.

So yes, with all that's out there, the bulls have shown tremendous resiliency. Tremendous staying power beyond what would seem even reasonably possible, yet we all know that's how it usually is. The bears need to get going here, and before they do, if we have a full back test of the breakdown at 1249, the S&P 500 will flat for the year. Amazing!!

The S&P 500 took out a very strong gap down between 1185 and 1199 today on the close. Not cleanly above, but five points above is a start. We were no longer oversold, so it was impressive work on their part. Massive resistance is at 1249 up to 1260 where the trend line is. 1230 is the 20-day exponential moving average. I thought we'd form a handle, and we're doing just that. The handle top is still not set, but as long as 1249 holds, we can use that level as the top. This is a 14% range, and a huge one, which can be very tough to deal with on a trading basis.

The key here is shorting the market on a reversal stick off the 1230 to 1260 level, wherever it may take place. On the down side, all that matters is 1101. Anything above that is just noise. No different for 1249/1260. Lots of whipsaw still likely for possibly weeks, if not months, to come. No reason to get bearish here unless the bears can forcefully take out 1101. The onus on them to get the job done, although you could make the argument the bulls have some pressure as well to blow through 1249/1260. Being as the markets almost always go up, the bears have their work cut out for them. Again, we'll look to short some on the right reversal between 1230 and 1260. Until then, cash is best.

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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