That’s what we saw today as the markets finally gave in to the overbought conditions that have existed for quite some time. Throw in rioting in the streets in Cairo, Egypt, and you have the formula necessary to finally get this market to top out for the short-term. We have had some really poor economic news lately and it seems strange that the market would not sell on it. But today it finally came home to roost as bad earnings from SanDisk Corp. (SNDK) and Amazon.com Inc. (AMZN) were catalysts to get some selling started. Then the rioting in the streets in Egypt gave it the extra kick.
As usual, the selling took out many weeks of small upside sticks. But that’s really just normal behavior when a market finally heads lower from compressed top-side oscillators that have been that way for months. The longer you stay overbought the harder the initial move down can be. The extent of the selling still to come is unclear as there are many powerful levels of support to be discussed later in this report. The bears have their work cut out for them, but today they finally got some relief.
The market didn’t crash out and won’t in my opinion, but the selling has begun. We won’t be down every day either. This is still a bull market until proven otherwise. There are no longer-term signals that suggests this will be nothing more than a correction but we always stay open to all possibilities of course. It’s just that today’s action does nothing more than get a well needed rest under way for the bulls. The bears have to have their time too and this should be it for the short-term. Bottom line is today we saw the type of candle sticks that suggests there is more selling to come in the weeks ahead. Adjust accordingly.
The selling today was across the board except for gold and some other commodity sectors. That was due to the natural climb that occurs from unrest in other countries. Many charts were shown to you that reveal some nasty breaks across many different areas of this market. That’s what takes place when a correction is getting started. If it’s just a real short-term sell off you won’t see this type of selling across the board. It’ll be limited to a few areas, leaving the majority of them in good shape.
That was not the case today. It was far more wide spread suggesting some deeper selling still to come in the short-term. In other words, money wasn’t rotating around as much as it has been in the very recent past. We saw selling everywhere. Little was spared.
It was worth noting that the economic reports of late have not been very good, and when that takes place Wall Street likes to play spin doctor. Really annoying to be honest. They blame the weather all the time like there’s any reality to it. A weaker than expected GDP report today, along with a poor durable goods report yesterday. We also saw employment claims rise quite a bit more than expected yesterday. It’s all the weather’s fault. The recent reports can only help the bears here short-term. The reports have been stellar for quite some time, and only in the very short-term have we seen some real erosion in the quality of the economic reports.
Some have been quite a bit below expectations. We can only hope that’s not starting a new trend. Hard to say, but it does have to be watched closely to be sure things haven’t suddenly turned around. Not to worry too much even if they have for Mr. Bernanke will print until he’s blue in the face. He will defend at all costs, including our future. He may not be doing the right thing here for the longer-term, but he really doesn’t seem to care. It’s all about the moment, and these things not occurring negatively on his watch. Alan Greenspan started this whole mess and Bernanke wants to be sure he doesn’t take any of the blame.
So let’s spend a few moments discussing critical support levels for the S&P 500 and Nasdaq. Let’s also take a look at how the oscillators have, or have not, unwound on the daily and weekly charts. First the Nasdaq. It lost the 20-day exponential moving average today by a large margin at 2708. It’s now well below and will act as resistance. 2647 is now the 50-day exponential moving average and is critical support. 2675 is gap support just above that 50-day. The weekly RSI is just below 70, thus, still high as are the oscillators. Still have up and compressed top side. Could use a more extended breather.
The S&P 500 has the 20-day exponential moving average at 1279. Right there currently. 1252 is the key 50-day exponential moving average. 1257 to 1262 is a gap.1227 is the November high. The weekly oscillator is still overbought across the board. In other words, the market would be best served to take a few weeks off for good behavior. It’s done a great job moving higher, but a rest would help things set-up much better for the big picture.
It’s best to sit back here folks and let things settle down. There are still no longer-term sell signals in place, but you always remain open to all possibilities. We watch how things unwind and move forward from there. When the market snaps such as they did today, it would be better not to run back in to new longs too quickly just because we’ve had some tiny unwinding. The masses have been trained over the past several months to buy every dip. It’ll be a lot tougher to get satisfaction doing that now.
Peace,
Jack
