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Stock Market Correction Continues...

Stock-Markets / Stock Markets 2012 Oct 13, 2012 - 06:26 AM GMT

By: Jack_Steiman

Stock-Markets

The question people are asking is really more about whether this is the beginning of something far more significant than just an ordinary pullback. When markets want to sell, they do so more than the average bull would like. This creates fear and pessimism, the two things the market needs. Markets find a way to do their dirty deeds. When it has its head down, you need to step out of the way. There isn't much anyone can do to stop the machine when the light has flashed red. So now folks will wonder. What we have to do is look objectively, and ask the same question. To me, this is right in line with what one may have expected once the market snapped. It has stair-stepped its way down with some acceleration lately.



The weekly charts tonight will show just that. Fear ramps, but, if you shove fear aside, you can see there is absolutely nothing bearish here. It looks nasty to many, but it's not nasty at all, bigger picture. That's what really matters. Even if we lose the 50-day exponential moving averages we are not necessarily turning bearish. We could go all the way down to the 200-day exponential moving average on the S&P 500 at 1367. That would be more than acceptable in terms of a correction off the frothy overbought top with which we were dealing.

Keep perspective and recognize how markets work to create the needed fear to be able to move higher down the road. It feels like there will never be another strong up-move, but it will happen once the correction completes itself in the weeks ahead. The real key is patience in an impatient environment. Few traders can sit around waiting for the right circumstances to present themselves. Relax as this all plays out over the coming weeks. I truly believe this is a correction and not the start of bear market. If I need to adjust I most certainly will, but, for now, this looks fine technically for the bigger picture.

One constant throughout this bull-run has been the financial stocks. They have performed very well after lagging for many years. They couldn't bid for any sustained period of time, and then things changed. When our market has sold recently the financial stocks held up very well. Until today, that is, as we saw earnings from Wells Fargo & Company (WFC) and JPMorgan Chase & Co. (JPM) this morning pre-market, not be accepted very well, especially WFC. This caused a move down that technically doesn't look great. It's not deathly, yet, but hanging on by a thread. The financial world of stocks looks ready to join the rest of the market in heading south for a while.

Again, this not the end of the world. It's just creating the necessary fear the market needs, while also helping to prolong the move south in the overall market. It would actually be bests if they don't recover right now, because if they do, it would create a strong negative divergence in its daily chart. The market needs none of that right now. With today's move down, it will likely help to allow the S&P 500 and Dow to lose their 50-day exponential moving averages in time. But we're not there yet. Again, this is screaming to all of us to keep exercising patience.

Many different sectors within the technology sector are doing something they haven't done in a very long time. They are breaking down, but not really bouncing when they get oversold on the short-term 60-minute charts. That's a real change of character, and once again, shows the markets short-term intentions. The technology world feels the slowdown first globally. Also keep in mind that this area of the stock market is where froth goes to live. Thousand P/E's, such as LinkedIn Corporation (LNKD) to 300 P/E's to Amazon.com Inc. (AMZN). These stocks are loved more than anything else when times are good, mostly because the shorts load up in them thinking they don't justify their value.

The bears are right. They don't, but no one cares when we're in bull-froth mode. However, in correction mode, it is very dangerous to play around with these stocks. Best to stay out of harm's way until the bloodletting is over. The semiconductors, along with just about everything else in technology land, including loved stocks such as Apple Inc. (AAPL) and Priceline.com Inc. (PCLN), are falling here. Nothing is really holding up at all. But that's normal behavior. If you have to play the long side, it's probably best to play the road that has S&P 500 and Dow stocks away from technology.

It's defense-time folks. No way around that reality. We do have some short-term positive divergences. They've been with us for some days and have yet to kick in. They still can, of course. For now, the divergences are playing out in an unwinding process without any price appreciation. That's not good for the bulls, but again, at any time we can see that play out. However, all the market is really doing here is creating a bear-flag set-up after the straight-run down. Up and down in a bear
flag. Not good news for the bulls, but we shall see how things play out.

For now, you should exercise extreme caution and let patience be your guide.

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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