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Weekend Analysis

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60's Impulse..Positive Divergences Loom...

Fri, Oct 30 2009, 09:40 GMT
by Jack Steiman

SwingTradeOnline.com

Yesterday we get some strong volume and blow through the 50-day exponential moving average on the Nasdaq. We fall only a bit below on the S&P 500 (4 points) and hold above it on the Dow. We didn't have all 3 major indexes trading below the 50-day exponential moving averages and that's what you want to see if you believe the market is ready for deeper selling than has already occurred. In addition, you don't want to clear by as little as we did on the S&P 500 as that's not a true breakdown. 4/10th's of 1% is not sufficient to say it's all clear for the bears.

So we had a nasty day and the bears were celebrating, but we also had something else take place and that's the reality that we got massively oversold on the 60-minute time frame charts. Stochastics below 5, and RSI's below 30, as low as 22, in fact, on the S&P 500. These types of oversold are conditions you NEVER add new shorts in to. Some type of bounce has to take place to unwind the oscillators and we sure did get that today. The thinking was you could add shorts on any move higher.

However, after studying the charts, WLSH, INDU, COMPQ, PowerShares QQQ (QQQQ), OSX, PowerShares DB US Dollar Index Bullish (UUP). It's clear to see that any move back down will create massive positive divergences. It'll also take place at very deeply compressed MACD cycle levels. That's not the best formula for shorting. It's in all likelihood the place to take some longs, even if just for a trade or two. This is a very complicated market that's giving absolutely no one any satisfaction and that's the reason for so little on our end in terms of plays. When markets can't find a true trend near term, it's best to keep things extremely light.
Always a time for aggressive playing in time. Patience is the hardest part of this game and unless you have lots of it, you can't do very well, especially in markets such as the one we're in now.

So what type of market are we in exactly!

It's a mature move up for sure. The very best of things have been seen for now. There's the lure or desire for more and it's very easy to get too caught in that. Conversely, there's the lure of thinking that because the move is mature, we should just start breaking down. Nice thought. No reality! Markets don't break that easily folks.
Not after such a long protracted move higher over eight months. Folks are trained to buy weakness. The desire to get the next leg up. Distribution out, a bull in, to a bear, if that's indeed where we're headed, can take many months.

Yes, I said months.

That's not unusual. If you all would think back to 2000, the market started to mature in late 1999, but didn't top on the Nasdaq until March 9th, 2000. It was roughly four months of distribution before the house of cards came down. And we may not be headed back in to a bear. That's very unclear. Just stating that if we are, you can not expect a crash right back down. If you have been, you've been extremely disappointed with the results and will likely continue to be so for some time. We are in a mature market that's either handling out waiting for the next move higher in time, or is maturing and distributing. That will become very clear in time. For now things are very unstable and volatile. A market where less is more.

The dollar has broken out of its wedge in a bullish fashion and is now in the process of back testing. If it's truly bottomed and if the market is truly topping, it should not fall back in to its wedge. If it does, it tells us that the move out was nothing more than a head fake and makes future moves difficult to trust. However, once a move like that fails, normally the next move will take a long time to happen, which, of course, would make our market that much more difficult. So far it’s held, thus we should see at least another move lower soon, but as I mentioned above, that move will open the door to strong positive divergences on the 60-minute time frame chart. Let's just say things aren't easy here. The dollar needs to be watched very closely here.

1047 remains the 50-day exponential moving average on the S&P 500. The small breach yesterday was a false breakdown. Until the bears can close this below this level by at least 1%, you can't trust the move with any real confidence. The Dow has yet to close below its exponential moving average at 9677. These levels can change slightly each day. 2083 is the number on the Nasdaq. The bears need all three of these major averages to close approximately 1% below those levels to feel they have proper confirmation. We know 1101 is the recent S&P 500 high and that will be incredibly tough here. We simply are trading between roughly those 50-day exponential moving averages and the recent highs on all the indexes with lots of head fake type moves to draw in your emotions. This tells us to keep things very light for now until we get some convincing evidence of what's to come.

Oh, and one last thing. Things change over time. Life is all about change. The landscape may have changed today, with that better than expected. Gross Domestic Product (GDP) number at 3.5% growth. It may not be real, or may not last, but that's not how we play. This is probably the reason for the large move up today and why any move lower will now set positive divergences.

Just another thing to keep in the back of our minds.

Published on  Fri, Oct 30 2009, 09:43 GMT