It was an interesting week from this perspective. The Nasdaq broke down out of its symmetrical triangle while the S&P 500 and Dow came oh so close but refused to give in. They had the S&P 500 below 1296 intraday (1291). The bears were starting to step on the neck of the bulls, but those pesky bulls found a way to get off the mat, brush themselves off, and close higher for the day, although well off the highs with lots of last hour selling. It’s true that the bulls lost the fight at the gap on the Nasdaq at 2720, which had to be expected since it’s the first test up. But at least they found a way to get closer to that lost 50-day exponential moving average. The bulls need to get back through the 2720 gap, and then back through the 50-day exponential moving average at 2729. Only then can they say they’re out of trouble for the short-term, or even for a day.

For the moment the Nasdaq is still trading underneath those nasty lost 50’s and, thus, the onus is now on the technology bulls to take back what they gave up after holding the line for so long. The lower froth stocks, and the lower P/E stocks, live in the S&P 500 and Dow overall, and this is the reason they have held up better. The fact that the S&P 500 held the 50’s today is nice, but it needs to clear back through 1314, or the 20-day exponential moving average, before things look more promising for that part of the market. So on this Friday in March, I can sum it up by saying that the bulls held the line for the S&P 500 and Dow, but lost it where it counts the most, the leader, or the Nasdaq. They must find a way, and find it quickly, to get it back. The longer it stays below the 50-day exponential moving average, the harder it will be to recover it. The bears get braver if they feel confident things are going their way. And since they haven’t been able to get anything below those 50’s, the fact that they do now, and if they can keep it there for a while longer, they will step harder on the gas and go for the kill. The bulls need to step up now, or watch a test down to the 2670/2760 level become the next place the Nasdaq travels to.

In markets such as these, you need to look around and see where there’s support. You also need to start watching those daily oscillators on the RSI, Stochastic’s, and MACD. Ask yourself how much down side is possible should the SPX lose 1296 down to 1294 with force. From the perspective of studying the oscillators we can see that there has been quite a bit of unwinding there. The Stochastic’s have come down from near 100 to the mid 20’s on average. Quite a move down to say the least. MACD’s are near 0 from the top, and RSI’s are in the 40’s from the 70’s. You can’t argue with the bulls who will say we haven’t had all that much price erosion versus how much has already unwound down. In bull markets you have to wonder if we’ll even get oversold, although that would undeniably be best for everyone if we did. The deeper we drive down those oscillators the more powerful the burst up will be. It also removes risk as the more compressed and oversold you get, the less risk is involved with new set-ups. You watch for some positive divergences off the 60-minute charts when the dailies get oversold and you fire out lots of new longs. The risk for failure in that situation is very low. However, things have unwound like I said, so it wouldn’t be totally out of the question for the market to try at least to fight back some. Interesting times.

Sometimes you have to look at the weekly charts to gain some insight as to where the market could find strong support. I am a big believer in the 20/50/200-day exponential moving averages more than any other levels from which others choose. Nothing wrong with those other levels, such as the 100- and 150-day. Any level is good to use if you have found a way to make it work for you, but for me, I prefer these levels. On the weekly chart, the first level to be hit from above coming down is the 20-day exponential moving average. Those numbers are 1264 on the S&P 500 and 2660 on the Nasdaq.

Of course, the S&P 500 must first lose 1296/1294 before the bears can think about 1264. If that does happen that would be a normal resting stop. With the Nasdaq currently below its 50-day exponential moving average, 2660 becomes critical support as it will get there long before the S&P 500 ever gets to 1264. If the Nasdaq were to lose 2660, it would drag the S&P 500 down with it. 2670 is also strong gap support, so the combination of those 20’s on the weekly chart at 2660, and gap at 2670, is huge for this market. If those levels go away then the market can free fall led by the Nasdaq, which is never a good thing for the bulls.

Things are a bit unclear here. Sometimes the worst of news doesn’t bother the market very much and sometimes good news doesn’t help it. For instance, you had a terrible tragedy today. The fifth worst earthquake since 1900, when historical data first began, which hit Japan, followed the usual tsunami that occurs. Hundreds died. Terrible destruction everywhere. The excuse was there for the market to just give it up and for the S&P 500 to lose the 50-day exponential moving average. It didn’t happen. The market found a way, which is beyond my understanding, to hang tough and erase early loses to finish green. On the other hand, yesterday we saw oil fall decently, yet the market fell as well. As oil went so did the market, meaning oil up equals market down. Not yesterday.

So some days the market acts in a consistent fashion. If one thing takes place you can count on a certain reaction. On other days it does not. A mind of its own, meaning in the end, the market is going to do whatever it planed on doing no matter what. What moved a market one way one day may no longer do so the next just, which, of course, makes us all feel lost. Truth is it’s normal behavior. Markets will ignore what it wants to, and take notice of what it wants to in order to satisfy what it wants to do bigger picture. How often have we seen in bull markets that bad news is ignored completely. We scratch our heads wondering why. How often have we also seen great news get ignored in bear markets. Bulls asking themselves, why isn’t this market rocking higher! All just a big game in which markets do what they want whenever they feel like it and will ignore what it needs to do to get where it wants to go.

For now it’s a learning phase. The market is not great, but is finding a way to hang in there just when it seems like there’s no hope. The S&P 500 saved itself and the rest of the market today by recovering from below 1296/1294. No guarantee we won’t wake up to a massive gap down on Monday, or for that matter, a massive gap up as the market message still isn’t totally clear short-term. Unwinding oscillators versus some poorer recent price action. Slow and easy here is best.

Peace,

Jack