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Stock Market Edging Higher...Resistance Right Here ...VIX Low

Stock-Markets / Stock Markets 2012 Jan 21, 2012 - 12:08 PM GMT

By: Jack_Steiman

Stock-Markets

The market is losing its volatility as the VIX drops, and that's not a bad thing. Nice and smooth is how the market is now trading. No major swings. No intense whipsaw. That's a welcome reality for all traders. The worst of times come when the market just flip flops all over the place, haphazardly, without much rhyme or reason. When the VIX starts soaring, it's lights out for this market in terms of performance. It becomes almost impossible to play. Many hundreds of points up and down in a single day on the Dow. With the VIX near 20, we don't have to fear the market. We know things will be tight, and thus, trading becomes more enjoyable. A strong market helps bring the VIX down, and that's why it's so low, although the market has not made the big breakout to this point. It has moved up decently, but yet to make the big one a reality. More on that later.



For now, we see a market that's trending higher, and seemingly wants to make the breakout over 1320 S&P 500 in time, but we can't get aggressive until we see it take place, and hopefully, with a strong gap up above. It feels like it'll happen, but you don't get aggressive on feel. You get aggressive only when you see the move, and it happens with all the necessary ingredients, such as volume, etc. A low VIX. An up trending market. Good internals, but no breakout, yet, so, we wait and see if, and when, it'll finally happen.

So, what's the fly in the ointment short-term? It's the overbought nature of the major index charts. Not all of them are at 70 RSI's, but they are very close, and thus, you know a pullback will have to hit one of these days soon. In strong markets, however, you can stay overbought longer than you'd think possible. The RSI's could always stay above 70 for a week or so. It does happen, but it doesn't have to happen so caution is the key for now. Exposure is fine, but too much is not. The degree of the pullback, when it comes, is difficult to understand. We're in a more favorable market, but you can't rule out as much as a 5% pullback across the board.

I've seen 5% pullbacks, and I've seen as little as 2%. You simply watch the short- and mid -term oscillators to gain greater insight as to how much we should expect when it actually does hit. Outside of the overbought conditions, there's little to get upset about if you're bullish. The oscillators aren't bad at all. The internals are fine. The action is clearly more bullish, and the earnings have been pretty good overall, with the usual number of mishaps along the way. In time, I think it's possible to break out, but we shall see. The overall suggests it's a real possibility, once we can unwind things a bit.

Markets can explode when they clear long-term down trend lines. That level on the S&P 500 is at 1320. Within a few points of it, but let's call it 1320 to have a nice round number to work with. The bears will be forced to cover quickly as new money will come in off the sidelines should this take place. The bears will be overwhelmed. They will have no choice but to run for the buy-back button. This extra fuel is what ignites strong rallies, once a critical level is taken over by one side or the other. Below 1320 the bears can still feel they're in the game and have hope, even though the market has gone against them, thus far, for the past few weeks.

We can make arguments for, and against, why this market should, or should not, break out, but the point is that it doesn't matter. Price action talks, and how those oscillators follow, talk even more, and for now, they're favorable, whether it's warranted or not. Maybe, in time, the market will fail miserably at 1320, and the bears will be vindicated for their gloomy outlook. We can all reasonably understand why they feel as they do. For now, the action says watch 1320 for the breakout, while 1267 should hold back all selling.

The earnings parade continues in a big way next week, and thus, we'll learn more about the health of our economy. There have been some huge misses early on in this earnings season; Google Inc. (GOOG), Capital One Financial (COF), and Parker-Hannifin (PH) to name just a few. There have been some great surprises. F5 Networks, Inc. (FFIV), International Business Machines Corp. (IBM), Bank of America (BAC), and others come to mind. The market, ultimately, moves on earnings. Not on what has taken place, but on what the market perceives will take place in the coming months.

It seems as if the message of the market is such that it expects things to remain pretty good for the next few months, at least. Only Europe hangs over us in a negative fashion. If that ever got resolved, this market would explode higher. Only time will tell that tale. For now, the market seems more concerned about the progress of earnings being made by the leading companies in the United States. It seems to like what it sees, so, who am I to argue with 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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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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