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Stock Market Tiring?.......

Stock-Markets / Stock Markets 2012 Sep 06, 2012 - 06:20 AM GMT

By: Jack_Steiman

Stock-Markets

That's the big question I am asking myself based on the action I'm seeing over the past several days and weeks. So many stocks are starting to break down below key moving averages while some are breaking out, but then, falling right back down. Not what you see when a market is getting ready to move appreciably higher. Lots of key stocks as well are breaking. Look at the move in railroad stocks today. It's just horrible as the sector itself broke down with stocks such as Norfolk Southern Corp., CSX Corp. (CSX), and Union Pacific Corporation (UNP) really having bad days on big volume. FedEx Corporation (FDX) warned last night, and after an attempt to recover, it fell hard late. The transports are just not acting well. You don't usually see the transports acting badly when things are about to blast higher. Add in the commodity stocks, and the industrial stocks, it isn't the best for the bulls right now.


Remember that we had a terrible ISM Manufacturing Report the other day. That's when the industrial and the commodity stocks really started to give it up. Fedex added in the transports, thus, the market seems to be in the crumbs stage of its move higher since the lows. This is not bearish. The market needs a rest anyway and this may be the beginning of the process to unwind deeper. The message seems to be more and more telling that the market is probably ready for some decent downside action in the not too distant future.

Based on what I just wrote, you would think I'm bearish. I'm not. Even if we fall 3-5%, that doesn't make things bearish bigger picture. Not only that, but we could actually still go higher first to test the old highs. The reason it wouldn't be bullish is because there would be strong negative divergences on any further move back to the old highs. The combination of potential future negative divergences and some complacency coming in probably means any move higher to the old highs, or slightly above, will be sold thereafter. Bottom line is when a market is acting such as it is now it's best to lay off the aggressive playing to the long side. It doesn't mean we fall immediately, but now it's time to be extra careful with your playing. Be sure not to do too much here.

Sentiment is now becoming a bit of a concern for the bulls. The bull-bear spread over the past month, or so, has taken a strong leap upward. We were in the teens and now the spread is at 26.5%. We are nearing the first red flag level of 30% more bulls. It doesn't mean it's an immediate sell signal, but when sentiment starts to jump too rapidly, it's not a great sign for the bulls. In addition, the AAII sentiment survey shows the highest number of bulls in quite some time. I don't give it the same energy when studying it as the Schaefer numbers I see, but you have to give it some real thought when you see bulls spiking up that rapidly. Not a good sign, once again, for the bulls. The market could use some selling for a healthier longer-term perspective. Some selling now would be great for the bulls, even though the bulls never want to see any real selling short-term. Focusing on the bigger picture would be wise.

1384 on the S&P 500 is the 50-day exponential moving average. A move below that would take us down to roughly 1360. We may just need that type of move in order to unwind sentiment and for the oscillators on the daily index charts to unwind further. They are still too high so a breach of good support would actually be a good thing for the market bulls. Keep it light for now, folks. Again, we could get one more high reading on the S&P 500, before we top out but that's no longer a certainty.

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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