Studying bull market and bear markets alike are more than a little interesting. Each market knows how to frustrate the opposing side. In a bear market, stocks get very oversold and they need to unwind those oscillators back up. Bulls get excited about the oversold conditions and think the next bull market is about to begin. The problem for the bulls in that situation is they forget that bear markets unwind oversold oscillators more through time than price. Bulls get more than a little frustrated, and ultimately, give up allowing the bears too seize control once you have a deep enough unwinding of the oscillators. It may take several weeks, or even months, but the bears eventually seize the day and drive the markets lower once again. It’s no different in a bull market. The market gets very overbought on many time frames. It needs to cool down for a period of time allowing the bears to think things are about to implode. They don’t. They definitely pull back some. That has to be expected as a part of the unwinding process, but the market does not crash out as the bears hope.
The market simply does what bull markets do, and that is to unwind the oscillators more through time than price. It can take more time than the bulls like, which continues to bring hope to the bears. But in time, the bulls take over and find a way to bring the markets back up, once there has been a long enough period of a breather. When the market starts to break back up again, the bears give up, and although that’s in the future, that’s the normal process that seems to be unfolding in this bull market. No different than all bull markets. There will be some decent selling, and thus, hope is born, but it never gets out of hand. The bulls will drive the market up in time, even if it takes months to do so.
You try to define an area of the stock market that tells you the bulls will be able to defend the selling necessary to help unwind things. We topped out at 1414 on the S&P 500, with the big breakout happening from the breakout at 1370. If we did fall to 1370, or breached slightly, that would be a 3% correction. That’s normal for any bull market. They can surely be even bigger than that. However, since 1370 was such massive resistance now turned support, the bears are going to have a very difficult time taking that level away from the bulls.
The bulls will fight very hard at this level, and really, the only way the bears will take it back is if there’s some really bad news to hit from overseas, or if there’s some really bad news from here at home, on the economic front. It would have to be particularly bad news, since the market is being defended intensely by Fed Bernanke, who will seemingly do whatever it takes to keep the market from falling too hard as he knows the market is the only way for folks to obtain good wealth, and thus, spend it in the economy, which in turn, keeps us out of a recession. 1370 is a beast of support, so only if we get the worst type of news should we lose it. If we lose it with force, we will have to reconsider what’s at play. But one step at a time as just below that breakout level is the 50-day exponential moving average of great support.
WATCH 1370 CLOSELY. There are the usual red flags abounding for this bull market, and they have to be taken seriously as you never want to let your guard down in any market at any time as things can turn instantaneously. Any news can hit from anywhere and change a bull to a bear, and a bear to a bull. We’ve seen it enough times through the past few decades to know this is without question true. So we look at our market and say, technically, all is well. However, there is the fundamental side of the equation. The problem there is Europe and China, but especially Europe. They had their manufacturing report two days back and it was a disaster. No other way to say it. Just horrible. Deeper contraction into recession territory than expected.
We, here in the U.S., have a similar report coming out on Monday, April 2nd. The market won’t be happy, if that report shows a contraction of any significance. It can still be above recessionary levels, but it better not have fallen off. That would be a real problem as many would say we’re following Europe, and all that stimulation by the cash machine, named Mr. Bernanke, still isn’t working. That could be the catalyst the bears are looking for to remove 1370 on the S&P. However, if the news is good, or even just decent, 1370 should hold, and the market will have dodged a massive bullet. This report is huge for the stock market, so prepare for that report accordingly. Here’s to hoping all is good, but it’s going to be an interesting report for sure.
So the bull market pushes on with enough doubt out there to keep things in a good place for the bulls. In a perfect world, the market will struggle for much upside for some weeks, if not longer. It would help to set up a better buying opportunity as the oscillators would move from overbought to possibly a bit below neutral, which would be super, especially if it stays like that for some time. 1414 is resistance, and that could get taken out to the upside, if the report on manufacturing is especially good. 1370 is massive support. Above 1414 we talk about 1440. One step at a time, but recognize we’re still very much in a bull market, even if we don’t go much higher for a while to come.
Peace,
Jack
