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Weekend Analysis

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Losing The 50's On The Nasdaq and S&P 500... Only Above On The Dow...

Thu, Oct 29 2009, 10:08 GMT
by Jack Steiman

SwingTradeOnline.com

That's what we did today. Actually did a little dance as we bounced off of them first, just to make the bulls feel things weren't going to get out of hand. The market had been putting in negative divergences after negative divergence for quite a few months off the March lows. As the move matured we could see each poor divergence getting larger than the one before. The red flags were up. I spoke about this day after day.
We stayed long because we hadn't seen a reversal stick that said these divergences are about to kick in for real. You have to stay with the trend for as long as it says to. Simple as that.If you started shorting, as many did, as soon as you saw the first negative divergence, then you paid a very steep price for jumping in. It looked like it was time to short but thesis was in tact. There were just no reversals nor loss of critical support that screamed to start shorting. This is what made finding the top so difficult.

We now know the top is in for a while if not lots longer. We know this by the way we took out three strong areasof support already at 1074 which had gap and the 20-day exponential moving average and today at 1060 gap along with 2116 Nasdaq gap at the same time and then the loss of the 50's today as well on the S&P 500 and Nasdaq at1047/2084.That's a major change of character. The trend now goes from bullish to, officially, a correction, and watching to see if it goes to bear, which again, occurs if we lose those 50-day exponential moving averages convincingly on all the major indexes, not just two. The level left being 9663 Dow. Also, we're not far enough away on the S&P 500 here to call it convincing, but we did close below.

We started slightly lower and tried to turn green, the Dow actually did temporarily, but it wasn't long before the bears established what the trend was going to be for this day. Bloody for the bulls and a happy dance for the bears. 1060 went away and we went right down to those 50-day exponential moving averages. We bounced decently off those numbers but nothing that was sustainable. The 50's are gone here and you can't feel good if you're 100% loaded up long as most folks are. They never saw this coming nor did they think it possible. The overall action today was nasty with the bears showing how fast things can turn when you least expect it. The bulls have nothing to play spin doctor with here. The bears have seized control of this market for now with today's overall action. No arguing that.

The dollar is in control and by the way the patterns are setting up on the major indexes, the dollar has probably at least put in a near term bottom, if not a long term one. That's sadly important to the future action. There are some strong positive divergences on that chart folks. This tells me there's a real possibility that the bottom is in there. All of this doesn't necessarily doom the market long term, but it does increase the possibility that this may be just the beginning of bad times to come for this market.

It won't be straight down, of course. Lots of bounces and now those bounces can be shorted. The market would have to get back through 1074 S&P 500 before you can even think the trend has changed back to neutral to more bullish. I would suggest avoiding longs overall, but you can always find spots for them if you're extremely nimble and can get in at extreme levels of oversold and get lucky. It's important to recognize where we are and to lose your emotional connection to being one sided. Most people are bulls and always want to get in long. Don't use that mind set here. Use appropriateness. Play the message in place. That message is clear here. We're in a down trendthus treat it that way, please.

To go over it one more time, 1047 S&P 500 is gone. Below that we have support at 1020. For the Nasdaq, we lost 2084. Next up is 2040. Dow has critical support at 9663. Below that we see 9400. Trend lines were broken today. You'll see that in some of tonight's charts. (WLSH, SPX Weekly & Daily Charts, COMPQ, SOX) The 50's were taken out on the Nasdaq and S&P 500. We will need to bounce soon from deeply oversold, but we are now down trending near term.

Published on  Thu, Oct 29 2009, 10:12 GMT