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Weekend Analysis

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Some Selling... Should Be More...Nothing Terrible

Fri, Nov 20 2009, 09:51 GMT
by Jack Steiman

SwingTradeOnline.com

A lateral range is simply that, a lateral range. It frustrates. It's annoying. The bulls want things to break out and the bears want things to break down. The bulls have had the best of it for sure and we have come oh so close many times to making that breakout move. We were on the cusp once again and once again the bears came in at the very top of those wedges and took the market down, especially the technology stocks. Those are the stocks that are most overbought and to be blunt, most frothy thus they took the biggest hit. Stocks like Apple, Inc. (AAPL), Baidu (BIDU), Microsoft (MSFT), Texas Instruments (TXN), CSX Corp. (CSX), and others I’ve discussed over the past weeks, just to name a few. At the top of those wedges we saw negative divergences on a few of the major index daily charts. We also saw overbought stochastics on the daily charts across all the major indexes.
Overbought with some negative divergences at the top of the wedges equal pullback time. Didn't have to as the market had fought through similar set ups previously, but this time the market took the hit. It looked vicious but it wasn't.

See today’s charts at SwingTradeOnline: COMP (Nasdaq Daily), INDU (Dow Daily), SPX (S&P 500 Weekly), SPY (S&P 500 Depository Receipts), SSEC (Shanghai Stock Exchange), BKX (Banking Index Daily).

The stocks that took the biggest hits weren't hurt from a technical perspective. They had made enormous moves to the up side thus a few days of nasty action will barely make a dent on them. It feels bad if you got in at the top but the truth is it's nothing from nothing. So we sit, after today's move down, back in the consolidation that no one really wants but has no choice but to accept. The bottom of the range all the way down at 1029. The top near 1110. I don't think we'll be seeing 1029 any time soon, but we probably won't see 1110 too soon either. With the daily charts still overbought you need further down side action to unwind things so they may try higher once again.

With Asia and Europe down overnight it was no surprise that we saw a nice move down on our own futures this morning. They started moving lower after the market closed on Wednesday and kept moving lower throughout the night. We recovered off the lows just before the market opened, but it was a gap down that we saw nonetheless. It churned a bit and then headed lower slowly but then more gradually throughout the day. Down nearly 1.7% on the Dow at the lows and over 2% on the Nasdaq. We started getting oversold some on the 60-minute time frame charts later in the day and thus saw a move off the lows in to the close, but nothing to get happy about if you're very bullish near term. Technology or the Nasdaq leads the market and that's what led this market lower today and this means a red flag for now. It says we likely will see somewhat deeper selling in the days to come although nothing that should be considered overwhelming for the bulls. A necessary down day to help unwind isn't a bad thing and today offered the first drops of relief for those overbought oscillators on the daily charts.

When studying different sector charts we see perfect back tests on the Biotech stocks along with perfect back tests on the semis that failed miserably after a massive downgrade of the entire sector by Merrill Lynch. Back-test failures aren't exactly the best recipe for overall market upside in the short term. The financials are flagging out in a bear formation, not a bull one. On the other hand, many sector charts are just hitting the top of their wedges and pulling back but are very healthy overall. This tells you that you need to be sector and stock specific when making your choices on what to play. Buy weakness in sectors and stocks that have pulled back to oversold and don't buy stocks that are simply not in good patterns, no matter even if they, too, are oversold because their the most likely to remain oversold, and also, the least likely to bounce hard even when they do go higher. Focus on healthy stocks, not unhealthy ones just because they've been hit hardest. This is the thinking that many traders get caught up in. Always stick with what's working and avoid the areas that are struggling. Transports and commodities stocks are working far better than semi-conductors or biotech stocks.

Keep in mind that only when we lose all of the 50-day exponential moving averages on the major indexes can the bears start thinking about dancing in the streets. Nirvana will be theirs, but until that takes place, it's simply noise time. Noise creates emotion, however, and this is dangerous for the average trader. 2106 Nasdaq, 1062 S&P 500, and 9880 Dow are those levels. We can breach these levels intra-day and it's meaningless noise still. It's about closes below. Deep closes below are best. So for now we're dealing with a pullback off the top of the wedges and it doesn't feel good, and this market will need more time before the daily charts unwind some very overbought stochastics coming in to today's action. The fact that they got this overbought is a sign of market health, not weakness. Keep that in mind. If the market was truly weak, you wouldn't see stochastics get up well in to the 90's with 100 the maximum level it can get to. Just recognize what's going on with the big picture. The market won't be easy from here for some time, but that doesn't mean there won't be opportunities. Always will be. It's just a more difficult environment that begs for self restraint.

Slow and easy is the only way or you'll get shaken out fast.

Published on  Fri, Nov 20 2009, 09:51 GMT