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The Power of the Wave Principle

Economic News Gets Worse... Stock Market Sentiment Unwinding....

Stock-Markets / Stock Markets 2016 Feb 25, 2016 - 05:24 AM GMT

By: Jack_Steiman

Stock-Markets

Lots of bad news for the bulls today as the bull-bear spread blasted up from -13.5% to just -1.0%. A 12.5 move of bullish behavior and thinking. Then to add to the bad news we saw the flash ISM Services Report, or the preliminary report, come in below 50.0 for the first time in three years. Down nearly 4% month over month, which shows a very strong decline in the overall economic activity for our country. The services sector had been holding up better than the manufacturing sector, but it is clearly playing catch up. This is the worst possible news for our economy, to be losing the last piece of hope for an economic recovery. Bad news on sentiment. Bad news on our economy in a very big way, and the result is a nice blast higher in our markets after gapping down nicely and running lower after we opened up for trading. Would you expect anything else?


As I always tell you, it's never about the truth, but about what the market wants. That's the tricky part of all of this. You have to turn off reality when you're playing this game. So today we saw an amazing reversal off the lows, which has set the market up for what should be somewhat higher prices. How high, I don't know for sure, but I could see 1970-2000 on the S&P 500. No guarantee whatsoever, but things are set up for higher prices short-term. Long term, the game is going to be far more difficult and frustrating, but for now today's action makes the short-term seem and feel more favorable. Oscillators confirmed things. The move down didn't push the MACD, down and that's what I hoped to see.

All we can do is play what we see and not what we know to be true. Even then there are no guarantee's but the set ups are there. Let's hope they play out appropriately. Sentiment really unwound this past week. Complacency already starting to show up across the board. A 12.5% push up in one week is amazing. That said, we're still below zero on the number, and that type of number is still favorable for a while longer for the bulls. If it should get towards 10-15% then things become a bit more agnostic short-term, but right now we don't have to worry about the reading, even though it's already starting to show how fast folks want to get back involved. The market over time should be studied hard with regards to sentiment extremes.

Most of the time it's a waste of time to include sentiment in to your thinking process, but when you get to below -10% on the reading for two consecutive weeks, you begin to realize just how many shorts had blasted in to the market. When there's too many shorts, the game of reality moves further and further away, since the market will now respond to short covering over true economic news. Shorts don't hold their positions very long, since they know markets go higher most of the time. The average short hold, I believe, is under two trading sessions. I think longs hold twice as long, thus, the game is always against the bears. Since they were loaded up as high extremes, it shouldn't be a shock that we are moving higher short-term. Sentiment is now the friend of the bulls very short-term. That will go away in time as always.

Here's the key for the short for the bulls and the bears. The S&P 500 has made a double top at 1947 from February 1 and February 22. The bears don't want this level to get taken out. If it does, they will be forced to, once again, cover additional short plays. That would be the fuel for further upside for the bulls. 1891 is now key support on any selling to come. If we do clear 1947 with a bit of force, like I said earlier, I could see us challenging close to S&P 500 2000, before things get very tough for the bulls again. We take this one day at a time and we make sure we, ourselves, do not get complacent. Let's hope for a gap up in the morning.

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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