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Stock Market Consolidating For Now Below 1260....

Stock-Markets / Stock Markets 2011 Oct 27, 2011 - 04:13 AM GMT

By: Jack_Steiman

Stock-Markets

There's nothing wrong with consolidation after a nice run up off the lows. Markets often rest when they get close to massive long-term resistance. The key to it all is how they consolidate, or not. If they just plunge lower, it's not the best action. If they hang around within a few percent of that massive breakout level, while things cool off on the oscillators, that's very good action overall. It appears, although no guarantee, that this is what's starting to set up for this market. The wrong news can come out and kill things, and the entire pattern in a heartbeat, but you have to look at what's taking place in the moment. For now, it says the market is handling out after a long run up. The handle could last quite some time, so you don't want to get too aggressive in it. But if this continues for a while longer without a major plunge lower, the bulls should be very satisfied with that type of set-up.


There are so many possible killers for this market out there globally that it's hard to allow yourself to get too aggressive, although the temptation is clearly there. You have to respect that things can fall apart in a moment, thus, some exposure is absolutely appropriate, while too much will be too emotional, and thus, it's not the right way to approach things for now. With the late recovery today in stocks, the bulls should be satisfied, but not complacent in their approach to being involved. The worst possible news could hit at any time from Europe and everything could change. So, please be cautious. Never let your guard down, because the moment you do, well, you know what happens. Nasty, unwanted lessons have to be learned. Don't take part in that if you don't have to.

The market rarely waits for the perfect entry, and does it's very best to keep you off balance. Keep you off guard. Why? Because it doesn't want too many people to do well. It wants to keep you in suspense. It wants you to look at those charts and say to yourself, oh, it's that level I should wait for to go long or to go short. It was clear that worked out today, because after yesterday's selling, it made sense that the market would trade down to the confluence of support provided by the 20- and 50-day exponential moving averages at roughly 1200 on the S&P 500.That would be the best place to buy again. As usual, the market kept you off balance as it shot back up today, especially on the Dow and S&P 500.

The Nasdaq was up, but lagging some due mostly to Amazon.com Inc. (AMZN), a fairly heavily weighted superstar stock that is no longer that superstar as it was annihilated today on last night's earnings report. It was pure froth that, deservedly, got crushed. So, while everyone waited for the moving averages to get tested, the market shot up and left the masses behind. Can't blame folks for waiting after yesterday's strong down day. It's yet another lesson in making sure you have some exposure at least, and that you stick with the short-term trend in place. Always keep an eye towards the bigger picture, but most definitely, you need to understand what the short-term action has been doing.

Most interestingly, the financial stocks have been performing the best lately, or at least well. Let me not overstate it. Bank of America Corporation (BAC), Wells Fargo & Company (WFC), Citigroup (C), Morgan Stanley (MS), American International Group, Inc. (AIG), are up a small percentage, but compared to what's been going on with financials most of this year, staying up, even if it is slightly, is a lot better than seeing those numbers in red. Goldman Sachs (GS), however, fluctuates between being up significantly, then down significantly, and then, as it was today, up significantly again.

That said, financials are doing well right now because the market believes Europe is going to find at least a short-term solution to their default troubles. Hopefully, longer-term, but at least short-term. Since the financial stocks have been so crushed, the hope of a solution is giving this area of the market a much needed boost, which, in turn, is helping to keep the market afloat as it rises higher and challenges S&P 500 1260, the big area of resistance directly above current price. If Europe becomes a disappointment, these stocks will fall flat on their faces once again. Not only that, they'll probably get harder than your emotions tell you is possible. That will cause you a lot of grief. I am not saying you shouldn't get involved at all. I am suggesting that you dance around these stocks carefully. Not too much exposure if you're looking to get involved. The reward is extremely high, but so is the risk. Be appropriate.

The sentiment update came out this morning as always. The numbers showed more bulls for the first time in six weeks over bears, but the numbers were still bull-friendly. The spread is now 2.1% more bulls. Two weeks ago it was 11.9% more bears. So, there has been some decent unwinding of the trade. However, there's still room for the bulls here. 2.1% more bulls is considered bullish from a sentiment perspective. The bears would like this number to get at least up to double digit more bulls. At least 10% higher, but more realistically, 15%, or higher. This low existing number of 2.1% more bulls opens the door to the possibility of the bulls taking out 1260 eventually. It won't be easy. It may not happen, but at least the trade is still open for the bulls should the right news hit from overseas. 1235 is good support. 1205 down to 1200 is great support. That level needs to hold onto any selling if the bulls want to get through 1260 at some point. It's interesting times for sure as we watch and learn the markets intent.

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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