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Catching a Falling Financial Knife

Some Selling Off The Stock Market Top...More To Come?.....

Stock-Markets / Stock Markets 2013 Feb 24, 2013 - 12:44 PM GMT

By: Sy_Harding

Stock-Markets

That's the big question. Was the two-day selloff all the bears will be able to get, or will it be the beginning of deeper selling to come as the index charts unwind further off the 70-RSI tests on both the daily and weekly charts. We will have our answers soon enough. Early next week should be telling about whether we gap over gap resistance or whether the gaps just above act as a wall, thus, starting the market down on the next leg of selling. From a purely technical perspective, it would make more sense to start the next leg down as the gap down was on heavy volume, and today's buying was on much lighter volume. Gaps are very tough to take back, especially on the first try, and with both the daily and weekly charts having reached overbought, it should be tougher to make a strong move back higher.


Anything goes once you're in a bull market, which we are, so it shouldn't come as a total surprise if we make one more move higher and create a deeper negative divergence to take us down. It's possible we can test 1530 again without falling first, but if we do, the oscillators will be quite negative. It would be best if we sold harder once again and allowed things to unwind, but we can't control the markets. This week saw the first snap down we've seen in quite some time, the Nasdaq falling 95 points from its high on Tuesday to its lows on Thursday. We retraced some of that move today, of course. It will be a big week next week as we see what the bears can do, or not. They shouldn't allow the Nasdaq to close above 3163, if they're serious about making some noise for the short-term.

Bull markets become repetitive for traders. They chase up any time there's even a hint of selling as they're always looking for an entry into plays they like to follow. High beta names for the most part. This is why even pullbacks can be difficult to sustain, at least at the very beginning of them. The trained behavior comes in and gobbles up what they've seen work over and over. At some point, it burns them, but until it stops working, they chase. If you want down side action, and you're a bull, you need patience. I feel strongly that, for now, the bull market is on, regardless of how strong the pullback becomes. The Fed has made it clear that they will not pull the plug on low interest rates.

More importantly, they have no intentions of pulling the liquidity plug either. The bulls know this, and so do the bears, and that's why sustainable downside action is very difficult bigger picture for the bears right now. They need a Fed who will allow the market to fall hard. But right now it's just not in the cards. So with everyone on board with their actions, the wash, rinse and repeat cycle is ongoing, pullback or not.

The one ongoing bear market continues to be commodity land, especially in the world of coal, gold and silver. There are others, but those are the key ones we all watch. Even with many of these metals extremely oversold on their daily charts, they are having a hard time getting any sustainable rally. They should rally a bit from here, but be aware of the type of market they're in and adjust accordingly. Many have stated the worst was over a year ago, but it just keeps stair-stepping their way lower. No sign of that changing. The fear bubble is bursting.

Chasing weakness is often a good thing but it's not good when you are chasing the falling knife. A bear market is just that, and thus, know when to step aside. Focus your energy where things are working. Good longer-term mature bases or stocks pulling back to support with the 20-day EMA higher than the 50-day EMA. Look for healthy stocks over weak ones and you'll likely have a better experience.

Deeper, longer-term support on the S&P 500 is at 1470 to 1480. That, I believe, may still be tested before we try much higher again, although today was quite strong, stronger than usual on a reflex bounce. That said, it could get tested, but if it does, it would provide a strong buying opportunity. S&P 500 1530 is resistance, and if that clears, it can see the 1550 level before trying lower again. We will get more insight on that very soon. Don't be shocked if we sell next week, but be open to both sides of the coin. If the Nasdaq clears 3163 on a closing basis, the buying is on again and the bigger pullback will have to wait.

Next week will be an interesting week.

Sy Harding is president of Asset Management Research Corp., and editor of the free market blog Street Smart Post.

© 2013 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Sy Harding Archive

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Catching a Falling Financial Knife