Stock Market Rally Time Off Retest?.......Still Some Positive Divergences...

Stock-Markets / Stock Markets 2016 Feb 13, 2016 - 06:20 PM GMT

If we study the market charts we can see quite clearly that we're seeing bear-market action. That said, you can't go straight down forever. The Nasdaq fell 18% in just six weeks. By any bear-market measurement this is too much too fast. Price isn't the problem. It's the speed of the move along with price. Such a short time frame to have that size of a loss without some type of exhaustion. One would think anyway. There are missing ingredients to a short-term bottom, such I have recently discussed. Nothing with regards to a high put-call ratio for several hours over 1.5. No trin at 3.0 or higher, and clearly no dramatic VIX spike.

All of these ingredients are usually present when a market is about to bottom. Not one of them occurred. Makes things a little less certain on the we have to rally front, but all of that said, the fall has been intense over a very short period of time, so the thinking is that we should rally a bit. Not the rally of a life time, but a rally, nonetheless, that should retrace some of the recent losses before we head lower once again. It can last for weeks overall, but not up every day. A trend higher over a few weeks that one would think should at least back test all of the lost 20-day exponential moving averages currently at 4479 on the Nasdaq, 1895 on the S&P 500, and 16,201 on the Dow.

We have a ways to go to get there, thus, it's still possible we'll see those levels before the overall rally ends. No promise, and surely no guarantee, but these levels make sense. Maybe we fall a bit shy, or maybe we clear them a bit before heading back south. Impossible to know, but again, some relief should be in the cards, unless this is one of those never-before seen types of bears. Today gave us the first sign of the potential rally, but we still have much to prove before getting up to those 20-day back tests. It's time for the bulls to act. Let's hope they have some guts and get us up for those back tests.

One real hope for the bulls near-term is the clear positive divergences that live on every major index daily chart. Sometimes the rallies off these divergences are muted to some degree due to the bear market just in its beginning stages, but they should allow for upside to unwind and relieve oversold oscillators. Even if they play out a bit, we can be hopeful for a rest from the recent carnage. The Nasdaq has the smallest, but is also the most compressed oscillator wise. A divergence doesn't have to be gargantuan as we all know by now. If it exists it exists, and they clearly exist on every major index daily chart. If they played out in full, the rally up could be rather large, or said better, larger than one might expect.

I don't think they will play out fully, but they are clear and present, and should allow for overall upward movement over time. It would be shocking if we just fell straight back down, but it's hard to measure what negative affect the Fed has had over the past many years, and just how angry the market may be. The monthly charts remain a major sell signal, thus, we can only expect so much from these daily divergences, but I think most bulls will be happy to get whatever they can since the wounds of this year have been so terrible for them. The other good news is that all of the divergences exist in concert. It's not just one sector. It's across the board, thus, there's short-term hope for sure for the bulls. We'll see how this unfolds next week.

When markets get desperate so do some higher ups. I'll leave it at that. Just yesterday I spoke about how the banks needed to firm up for me to get more bullish short-term. It seemed to me that without the banks the market wasn't going to get rocking, positive divergences or not. And wouldn't you know it. Suddenly we hear Jamie Dimon, or the CEO of JPMorgan Chase & Co. (JPM), announce he himself is buying a boat load of his own stock. Very interesting timing. Yes folks, I do believe this came from Fed Yellen. Another bullet. She knows the market was at the precipice of losing the banks, and, thus, I believe they all worked together to make it happen.

Whatever you believe I guess doesn't matter. We got this very interesting timing of a massive buy back by the CEO himself, and off these dramatically oversold stocks went. They need to show some staying power next week so we'll see if they can follow through, but that buy back by Mr. Dimon was clearly the catalyst to get the market rocking higher today. The banks will need to keep racing ahead for a few weeks overall to get those divergences to play out to their fullest capabilities. Bottom line is the market got what it needed before it lost key support at S&P 500 1812. Now we watch to see what it can do to the up side, and whether all of the indexes can rally up to their 20-day, exponential moving averages, which would equate to gains of between 3.5% and 5% from Thursday's closing prices.

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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