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Stock Market Hesitation Or Black Candles After Recent Run Up.....

Stock-Markets / Stock Markets 2011 Sep 01, 2011 - 01:47 AM GMT

By: Jack_Steiman

Stock-Markets

The market has been on quite the bullish run of late. Many factors acting in its favor from too many bears to oversold daily charts. Some very deeply depressed oscillators to say the least. This combination has seen the market go up in the face of mostly poor economic reports. Sometimes the technicals outweigh the fundamentals, but that's usually only for the very short-term. Like I just said, too many technical factors came together to provide a nice run up all the way to the 50-day exponential moving averages on the daily charts for the S&P 500, Dow, Nasdaq, and other indexes. We tailed off those 50-day tests today. Nothing horrendous, but we did tail off, and what's key about it is the fact that we gapped up today off this nice run up. But after that gap up we saw on balance sellers for the rest of the day with the DIA closing on a Doji, the Nasdaq and S&P 500 closing with black candles.


This usually, but not always, means some selling is likely to come in the very short-term. Some of that will depend on upcoming economic reports, which I will be speaking about later on in this newsletter. However, from a purely technical perspective, we should struggle for further upside very short-term. The bulls can feel good about the recent action, but they should be turning a bit more defensive for the very short-term. It doesn't mean the selling has to be terrible. It just means some selling is likely. It also doesn't mean the selling can't be intense. It can. I will be discussing more about what type of selling we may see in the near- to mid-term later on in this report. Bottom line is today was the day the market put in some type of normal reversal stick, and thus, we should see some type of pullback in the very short-term.

So what type of selling can we see? It depends on how the next two critical reports on the economy come in. Tomorrow morning we have the ISM manufacturing report. The report comes out thirty minutes into the trading session. On Friday morning, pre-market, we have the critically important Jobs Report. Both very important, but to me, the ISM Report on manufacturing tomorrow morning will be huge as it was the last report a bit over four weeks ago that sent the market spiraling lower. The report is actually expected to come in recessionary at 48.8. Anything below 50.0 shows a contracting economy. The question is: What will the market think of a report that is recessionary but in line? My guess is it won't be very happy nor should it be. It would probably be the catalyst for a short-term sell off. In line, but recessionary just can't be a good thing for anyone.

The last report came in with zero growth at 50. If the number comes in below 48.8 the market will likely take a real beating. Anything above 50 and the market will really like it. The Jobs Report will probably mirror the ISM Report, and so much of the action to come will likely be off the ISM Report, but if the number on jobs is really bad, the market will sell hard for sure. The next two days will be more than interesting, but the majority of the action should come off the ISM Report tomorrow morning at 10 am eastern time.

The bearish trade is getting very full folks. The bull-bear spread last week was down to 7.6%. Not a good number for the bears, but things went from bad to worse today as the number dropped to 4.3%. Anything below 10% causes the market to have a hard time having sustainable down side action. It can fall for sure. Fall hard in fact. However, having sustainable moves over many weeks is very difficult for the bears when you get below 10%, let alone the number now, which is 4.3%. You can invert, and that does happen from time to time, but 4.3% is a very low number not often seen. In other words, people are very bearish, and the trade is probably about full, so it will be tougher and tougher for the bears here unless the economic news comes in beyond bad.

A rally, or at least a sideways market over several weeks, would seem to be necessary in order to unwind those bearish numbers back 10%. The bears actually would be very happy with 15-20%. Look, if the ISM comes in at 44 tomorrow and the Jobs Report is just awful, the market will get hit very hard. The market can only handle so much bad news. If the news is bad enough, the bulls will not get involved, and the bull-bear spread could easily invert. However, as long as the numbers aren't beyond bad, the bears will struggle for too much down side action very short-term.

It was another bad month for the market. A month that sent all of the indexes into the red for the year. For the month of August we saw solid losses across the board. Down 4.36% on the Dow, Down 6.42% on the Nasdaq, Down 5.68% on the S&P 500, and down 6% on the Wilshire 5000. We finished well, but the beginning of the month was crash-like, thus, the reason for the losses for the month. With all the global problems the market has faced throughout the year, things could be a lot worse in terms of yearly losses across the board. The S&P 500 is only down 39 points, or a drop over 3%, for the year. Not great, but considering our own internal problems from politics to the economy, it's actually quite astonishing we are where we are at this very moment in time.

Besides our own back yard, we are dealing with Greece and other European countries who are dealing with default possibilities. Also, Germany has told the rest of Europe that they should not be looked upon as the savior many thought they would be. They just don't have the dollars to bail out all of those other countries who were praying for that to be a reality. In addition, anyone willing to help bail out the needy is asking for collateral. Collateral the troubled countries just don't have. In other words, they're all on their own. A scary thought to be sure. Somehow things have held up, and who knows what it would take to get this market melting down. In the end, it would take a confirmed recession to get this market to fall apart. If we can avoid that, then things shouldn't get too bad when you figure in the sentiment issue the bears are dealing with right now. This is why the two reports coming out in the next two days are so important. They will tell us much about whether recession is here or not.

Resistance at S&P 500 1236 is still tough to get through. 1208 down to 1190 S&P 500 is good support. The market is at a critical juncture here. Let's keep it light and see what the ISM Report on manufacturing will tell us tomorrow morning.

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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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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