Jack's Wrap for 05/02/2012 - Negative Divergences Unwound....

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As the day moved along yesterday, I noticed the short-term 60-minutes charts got both a bit overbought, and they also printed negative divergences. From that point, yesterday until early this morning, the Nasdaq fell sixty points, two percent to work off that combination of overbought and poor divergences. That's about what it usually takes, give or take one percent. Remember, these bad divergences, and overbought conditions, occurred on the 60-minute time-frame charts, and not on the daily charts. That's key as those 60-minute charts can unwind those conditions within one to two days, while, if they took place on the daily chart, it could take several weeks, and sometimes even months. Never panic out of long positions just because those negatives set-up on a 60-minute time frame on all the index charts.

Definitely, get out of all longs, if the daily charts flash those nasty divergences. But we're not close to that now, so the unwinding that took place fits perfectly within the scope of what this market has been doing for basically two months now. Sitting, and riding back and forth, in an ever-evolving base/handle, 1422 the top of the base for now, and 1357 the bottom of the base for now. The bulls came in today, and didn't allow things to fall too far. They actually got the Nasdaq to turn green at days end. The whipsaw continuing as expected, with this possibly lasting many more months. I'll speak about that in detail below. It was good day for the bulls overall as they held the fort after more economic news came in poorly.

The whipsaw should last months, but I think we've not seen either the top of the base/handle, nor the bottom of this base/handle. Also, over the next few months, the range will expand out both ways. We'll break over 1422, before this run is done, and a move below the double bottom at 1357, will take place as well. They can take place many months apart, and if they do, you'll probably end up with a six-month total base that will drive most traders nuts.

The head fakes will be too numerous to count on both the up and down side. Again, many days, or even weeks, it will seem like the bull market is ready to rage on again. Many weeks will feel as if we're starting a new bear market, especially if we fall below 1357. It'll feel really ugly to everyone, with sentiment eroding very rapidly. It could easily turn out to be a base/handle from 1440/1450 down to 1325/1340, quite the base to lose your minds. It'll be interesting as it unfolds, but for now, I think the short-term is still in the favor of the bulls, with a possible move over 1422, but not by very much, if it does happen to take place.

The market is in a mostly ignoring bad news mode again, but there is a second major report this week coming on Friday, although we'll get the important jobless claims number tomorrow, before the market opens for trading. The jobs creation number is out pre-market on Friday, and this one is almost as important as the ISM Manufacturing Report that we heard about on Tuesday. The report on Tuesday had very good numbers behind it, which was a big surprise to the upside.

The market blasted up initially on the news about the report. However, the majority of reports have been coming in rather weakly these days, so this jobs report will receive a lot of well-deserved attention. If the report is acceptable to the market, we have a decent chance of getting above 1422. It would be interesting to see how adversely the market would react, if the number is a big disappointment. The market is not, at least for now, selling on bad news, but it would require some big time work by the bulls to hold this market, if the jobs number is a real dud.

It's interesting times as always, folks.

Peace,

Jack

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