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Stock Market Very Sick...And Oversold....

Stock-Markets / Stock Markets 2012 Jun 05, 2012 - 06:12 AM GMT

By: Jack_Steiman


Both are true, to be sure. It's rare that the market stays this oversold on both the daily charts and its index charts. It's not much to get excited about, if you're short when you're this oversold. But it's nothing to get excited about, if you're a bull considering how much trouble the market is having with regards to bouncing hard at such oversold conditions. The fundamental news continues to be mostly sour for just about the entire world as everyone seems to be slowing into a recession and for some, worse than that. There's the occasional good spot here and there, but overall, the majority of leading countries are struggling with massive debt and a slowing economy. The slowing, rapidly-moving-along into what is clearly a recession just about everywhere, which means the price of stocks have to come down in order to make them become more fairly valued. Not a pretty picture.

Markets don't blast higher when these conditions exist. To expect them to just because we're oversold makes little-to-no sense. There are always bounces, such as the one we're due right now. Who knows if it'll happen, but it is due, and they will come from time to time. No way to stay oversold for too long across all the 60-minute, and daily, charts. They may do no more than that to unwind in a bear flag, but the oscillators will need unwinding, and very soon at that. That said, make no mistake that our stock market, along with the majority of leading stock markets around the world, are very sick, and aren't likely to be getting well any time soon.

There are some small positive divergences on a few daily charts, but they're not across the board, which is what the market would need in order to form a more meaningful bottom for the short term. The NDX has one. The financial stocks do not, and it's, basically, like that if you go sector to sector, or index to index. Strong divergences on the positive side show up everywhere when you see the real bottom everyone would love to see take place. Usually this all equals a bear flag over time, and when the oscillators unwind, the next leg down in the bear market begins again. It's no different than bull markets, if you take the time to study them.

They go up hard and get overbought. When that happens, they form small negative divergences, which really only unwind from overbought, but with very little price depreciation. After some time the next leg up begins. If the market can't rock up while things unwind, when they actually start to rally a bit, it means in short order, another leg down will commence. Don't let the few small positive divergences get you to go overly long, which will likely mean some big losses to those who get aggressive. Go slow and easy if you need to go long. No more than 15% exposure long or short, especially long when oversold.

Fed Bernanke is speaking on Thursday, and the market will be listening to what he has to say. I personally hope he keeps his mouth shut regarding QE3, but he uses these speeches to give his hints about the future. I personally don't think the market would blast up the way many do, if he does implement another quantitative easing program. We've all seen QE1 and QE2 fail along with twist and shout. We've seen Japan try eleven of these programs when their market was crashing, and all it did was ignore them all and fall 30,000 points from 37K to 7K.

After a while, people recognize junk when it's presented to them. There are no shocks here anymore. QE is not the be-all and end-all it once was taken to be, thus, don't get too excited if you hear it announced. The old days of free money, and what it can do for the economy, has become understood for what it is. It's bad policy once the sugar high wares off rapidly. It won't fix the ills of greed and corruption.

The market is now stuck between two critical areas on the S&P 500. The long-term uptrend line comes in at 1250 on the S&P 500. That number is 2690 on the Nasdaq 100. Resistance, strong resistance at that, is at 1292 on the S&P 500. Whichever breaks first should have a bit of a run to it, but to be honest, 1250 is more critical than 1292, because it's a three-year stock market, 2009 low up trend line. If we lose 1250, it will get very ugly very fast around here. We are oversold across the board on both the daily and 60-minute charts. We should bounce, but there are no guarantees to be sure.

Keep it extremely light short-term as you shouldn't expect too much upside action even at oversold. Shorting below 30 on the RSI's also makes little sense. Important times ahead, especially for the bulls, if we lose S&P 500 1250 and Nasdaq 100 2690.



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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© 2012

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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