Stock Market Gap Up and Reversal...Mild Retreat...

Stock-Markets / Stock Index Trading Oct 20, 2009 - 09:43 PM GMT

Is it a sign of further down side action to come?

Based on technicals I'd say yes but if you're expecting a market free fall, you're in the wrong game. We gapped up today and clearly that gap was sold but whenever we got near 10,000 on the Dow, the bears got their usual cold feet. However, with many good earners from last night printing black candles, meaning more sellers than buyers once it opened for trading, it tells us a lot of the good news is in near-term on this market. I will remind you again, that does not mean the market gets crushed from here. A 5% pull back over some weeks is possible but no guarantee. If the pullback is tepid and on lighter volume with unwinding oscillators, you can expect another move back up once the selling ends.

By the way, it's a big if that we'll get even that much selling. So many gaps and trend lines along with strong moving average support are not too far underneath current price. Each one of them will give the bears problems as they have been doing so for quite some time. We gapped up today but the market sold the great earnings news from AAPL, TXN, and others. After racing lower, the rest of the day was spent slowly climbing back up but still staying red. The bulls shouldn't be thrilled because of this reversal but the bears couldn't do much once we got near 10,000 Dow. No one wins today but a start for the bears.

The market is acting more fairly valued. The crux of earnings is over with regards to the big boys and girls but others still out there as we march along. The fact that we didn't see a blast off today tells me that earnings are actually not the markets best friend right now because if we can't blast up on Apple Inc. (AAPL), Caterpillar Inc. (CAT), and Texas Instruments Inc. (TXN), what would happen if we get an evening of bad news?!

It seems as if the market may now be looking for a catalyst to get things to unwind and calm down. It would definitely be healthier if that were to take place. It would allow those negative divergences across the index charts and on many leading stocks to play out. It would then allow the oscillators to get oversold and once we can get oversold with much lower MACD's we can start thinking about a more sustainable upside cycle again. Anything up from here will be a grind. Not smooth.

The PowerShares DB US Dollar Index Bullish (UUP) chart is included with tonight's report. Take some time to study it and notice the massive positive divergences in place along with very oversold conditions. (Be sure to view all of the charts–SPX, WLSH, INDU, QQQQ, SSEC—as it will keep you up-to-date on the daily trends).

I know it feels as if the dollar can't rally but look at that bullish falling wedge. If that pops out of the top, this market will take a bigger hit. It can happen. Just because it's been awful doesn't mean it's going to stay that way forever. There are bullish short-term signs for the dollar and we should respect them.

This is a very complicated market. The up trend in place is very strong and it has been fighting its way through this bearish rising wedge and we've enjoyed that. I do believe we are at a point here where up side is going to be very labored and difficult. We know 1080 is huge support but if that goes, we can see a larger flush down.

I think the chances of this taking place are gaining traction. I want to remind everyone that if we do go lower here, this has a decent chance for setting up further upside action but the red flags abound after today's reversal nearing the top of the wedge and those nasty black candles on stocks such as AAPL, TXN, and CAT.

I would not be heavily long nor short anything. Some light exposure either way is fine where it sets up but anything aggressive here tells me you won't get the best results as the emotion of things will wreak havoc on you. When markets top short-term they put in lots of head fakes and do their very best to keep folks buying on all weakness. Once enough longs are in, the market then tends to sell harder. It feels like it can't fall and then suddenly it does.

Please tread lightly here.

I believe the overall trend for a while is going to be somewhat lower.

Peace
Jack Steiman

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.

Mr. Steiman's commentaries and index analysis represent his own opinions and should not be relied upon for purposes of effecting securities transactions or other investing strategies, nor should they be construed as an offer or solicitation of an offer to sell or buy any security. You should not interpret Mr. Steiman's opinions as constituting investment advice. Trades mentioned on the site are hypothetical, not actual, positions.

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