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Oversold Stock Market Bounces...

Stock-Markets / Stock Markets 2011 Sep 13, 2011 - 05:09 AM GMT

By: Jack_Steiman


This morning I spoke about how the 60-minute index charts were oversold, and thus, it wouldn't be very wise to short the gap down that was going to take place due to more bad news in Europe. The gap down took place, and then the market went back and forth, down as many as 150 Dow points before reversing late in the day. At the same time those 60-minute charts got oversold, the PowerShares DB US Dollar Index Bullish (UUP) chart got overbought. It wasn't on the 60-minute chart, but instead, on its daily chart. It had a 70 RSI reading. We all know that 70 RSI's are not the best conditions for further upside most but not necessarily all of the time. In this particular case, that was true for the dollar, which remains very bullish bigger picture on its chart. That was it for the very short-term, and thus, the reversal on all sides here as the dollar fell late and the market surged as that fall took place. It was a nasty black candle on the UUP today with the RSI still at 71 on its daily chart. This is an indication that the market is about to engage in more upside action in those nasty bigger-picture bear-flag patterns.

It came close to breaking down today, but no dice. Bears couldn't get it done. Now it's back up for a short while as the dollar unwinds its overbought conditions and black candle. Today was a day where the bears came close to breaking things down. You'll see those in the charts provided for you tonight. In the end, however, they couldn't get it done. Long tails at the end of the day would be an understatement, and this almost always leads to some type of short-term rally in equities. Nothing in this game is etched in stone as some bad news could always hit overnight, but the odds are high that we'll see some type of move higher for the very short-term. Today was a day for the bulls when all was said and done, but only for them short-term. The bigger picture remains bearish with the primary trend lower.

Let's spend some time talking about the dollar. What an incredible move this vehicle has made over the past few weeks. A hollow candle was printed ten days ago off the bottom, and it hasn't stopped rallying until today's topping stick showed up. It makes sense for it to pause here and refresh. However, since the dollar trade has been inverse to the stock market, this doesn't bode well for equities bigger picture as the massive breakout in the dollar should continue shortly once it takes time to work off the overbought conditions, which created its black candle today. The move to the up side has taken out all the key exponential moving averages, which indicates to me that this move up is going to stick.

This move shouldn't be some knee jerk move up that falls right back down and collapses. Not at all. This move should be able to continue higher once it settles down to refresh for a while. It's just a very powerful move that needs to be respected by all for what it says about the stock market bigger picture. That is unless the trade suddenly reverts to what it did many years ago when the dollar and the stock market moved in tandem. For now, they're inverse, and this just isn't good news for the stock market. The dollar says lower equity prices are out there in time.

The big issue for the United States is the creation of new jobs. Not only that, but for the existing jobs that to remain firm. For those who have a job, it would be necessary for economic conditions to improve enough for them to keep it. Unemployment has to get better, however, just as important would be for those who have jobs to keep those jobs. So we look for insight as to whether this phenomenon is taking place. Clearly we can see the answer is a resounding "no". Just today, Bank of America Corporation (BAC) said they're laying off 30,000 of their 290,000 employees.

More than 10% just like that. Those 30,000 lost jobs will hit our economy, and our unemployment rate, in the near future. Things clearly aren't good at BAC, and most banks for that matter. This is really bad news as it tells us that the economy doesn't look good down the road, at least to this massive financial monster. The fact that they can't see light at the end of the tunnel tells us just how bad things truly are. No relief in sight either, at least not to them. Not good for the market bigger picture. It wants to see corporations hiring. It wants to see those layoffs stop. It's getting neither for now. Sad times for too many, unfortunately.

The stock market has many enemies and only one real friend. The enemy list is too long to bother listing as we all know the headaches this country is facing, and the massive headaches Europe is facing these days. The only friend of this market is sentiment. Wednesday morning should be very interesting indeed. We get the usual bull-bear spread update, and my guess is, it will be inverted for the first time in a very long time. No guarantee, but the spread was only 1.1% more bulls last week, and my gut says we'll actually have more bears now. That is quite unusual. Normally this reading would stop the massive bleeding the market has been feeling, and will now as well, unless we get that news that makes nothing else matter.

The huge default either here or abroad. A default that sticks. A default where no one bails out the defaulting country or bank. Only that type of bad news could kill the market here. Other than that, there isn't any real news to kill this market because of the extreme of sentiment. This would mean that it's quite possible we'll be dealing with this bear flag for quite some time to come. 1130 is key support. 1101 is the line in the sand for the bulls. 1185 is resistance. 1200 to 1235 is after that. The flag runs from 1101 to 1235 in price. We may trade between those numbers for a lot longer than we'd care to.

Day by day as we navigate through the mess.



Jack Steiman is author of ( ). Former columnist for, 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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© 2011

Mr. Steiman's commentaries and index analysis represent his own opinions and should not be relied upon for purposes of effecting securities transactions or other investing strategies, nor should they be construed as an offer or solicitation of an offer to sell or buy any security. You should not interpret Mr. Steiman's opinions as constituting investment advice. Trades mentioned on the site are hypothetical, not actual, positions.

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