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Weekend Analysis

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Nowhere...

Wed, Nov 4 2009, 10:01 GMT
by Jack Steiman

SwingTradeOnline.com

I can try to think of a catchy title but what a waste of time. Only thing to say is what I said. We are Nowhere folks! The tape isn't a thing of beauty for either the bulls or the bears. It's playing, on almost a daily basis, with the 50-day exponential moving average on the S&P 500 while trading above it on the Dow and below it on the Nasdaq. A hunger for lower beta and lower P/E's is the story these past few weeks. That happens when markets, at the very least, are in correction mode. We fell 7% off the highs but there's been no follow through at the 50-day exponential moving average on the S&P 500, and considering we have the financials living there, they will have to falter much harder than they've already done for the S&P 500 to start looking truly bearish in nature.

What appears to be taking place is the market is waiting on two gigantic events this week. We have the Federal Chairman Bernanke’s ruling on interest rates and his thoughts on the state of the economy this week as well as the powerful Friday’s Jobs Report, which will, of course, be on Friday. The market wants insight from both before deciding to take those 50-day exponential moving averages back or losing them for quite some time. Both are very key reports in that the market wants to know if the Fed is going to raise rates in the near future. He won't say if he is outright, of course, but he will hint at it if that's his intention. If he does hint at that, my gut says the dollar moves up and the market falls hard. The market also wants to know if the bleeding has stopped in terms of job losses, and if salaries are moving higher. Also hours worked. With the Fed out tomorrow on interest rates, we will get plenty of fireworks soon enough. The fun is about to begin.

We started the day lower, despite some great merger and acquisition news. BNI (Burlington Northern) and BDK (Black and Decker) were both taken over pre-market at huge premiums to their closing prices. You would normally equate this to a market flying higher before the opening bell rings, but strangely enough, not today, even though we were oversold. We started the day lower and spent the rest of the day going back and forth, although most of the time was spent in the red. A late bid took the S&P 500 and Nasdaq in to the green with the Nasdaq leading up, which is good. The Dow fractionally red on a percentage basis. Again, nothing from nothing, but yet another day where, although it's below the 50-day exponential moving average a bit, the bears were unable to take it down with force. Below, yes, but no follow through by the bears, which leaves the door open to recapture if the news from Fed Chairman Bernanke and the jobs report are very favorable toward low rates and economic growth. A big if.

When markets go lower and look bad, fear rises. The average trader or investor sees red arrows and thinks this is a definite prelude to destruction of equities. People have lived through two nightmare bear markets over the past nine years. The kind seen once in a hundred years, yet they've had to survive the torture twice in just those nine years. Red to them now means the potential for something unthinkable. It's understandable as fear is a much more powerful emotion than greed. Greed requires no emotional energy. You flow with it. There's no pain.
Fear is created through bad experiences and thus will always carry more weight.

The question before us, therefore, is whether we're headed for the dreaded bear market once again. I'd be foolish to tell you that we definitely were not. There's always that possibility. In the short term, I don't see anything worse than the old low at S&P 500 1020. 2.5% from here. No fun, but nothing devastating. The reason is, the oscillators on the daily charts. Tremendous unwinding of those overbought daily oscillators has already taken place. The nasty negative divergences have already unwound plenty. All of this doesn't preclude the possibility that we could stay very oversold for a long time, but this is not usually the area one would equate with the beginning of market annihilation. I'm sorry bears, and I could be dead wrong, but short term I don't see anything worse than 1020 S&P 500.

S&P 500 support, critical support, is now 1020 with 1047 resistance. Then we see 1060, 1074 and lastly, 1101. I don't think we have any chance of seeing that level short term. Below 1020 we see 980. Nasdaq resistance is at 2083. 2040 is massive support followed by 1960, a full 4% below. That would be painful indeed. The markets are vulnerable here. Good news is, being ignored somewhat as it was built in long ago in this rally off the March lows at S&P 500 666. This is a VERY DANGEROUS market. Aggressive playing makes no good sense. A nibble here and there such as we did today on the QLD (Ultra QQQ ProShares) is all you should be doing with a tight stop in place. We got QLD at 48.10, but have a stop only 1.10 lower at 47.00. No big losses will be tolerated here. Please go very slow here. Accept what's in place and take measures accordingly. Almost all cash is best if not all cash at times.

Published on  Wed, Nov 4 2009, 10:03 GMT