Big gap downs in big leading stocks often means a short-term top has been put into the market. It’s a disappointment to those who realize things just got tougher. Many won’t, however, realize that the trend has changed short-term, and will be doing too much chasing stocks short-term. They’ll get frustrated, however, sentiment will fade back, the market will unwind, and then head higher with some force once again. The big leading stocks that had big gap downs today had been on high poles. They were very overbought for a very long time. RSI’s over 70 for weeks, and many times, for months. That’s simply unsustainable. You get the gap down off the top and the highs have been hit, and won’t be reached again for many months. There’s nothing wrong with this scenario, folks. The market has desperately needed an extended vacation from sustainable upside for some weeks now. The RSI’s on the weekly index charts either hit, or were just below 70. That’s simply not good news for the market. When weekly charts start confirming the daily charts, it’s time to take the foot off the pedal and recognize we need to cool off for a while.
The gap downs in those leading charts put the ball into motion on that scenario today. So now we’ll need to relax for some time and play accordingly. The big picture trend is up. There may be a time to short a bit in the weeks to come, but plays should still be mostly on the long side. They’ll be best when 60-minute charts flash positive divergences. There won’t be too many opportunities on either side, and when you do play, you’ll have to take plays off rather quickly. Keep stops very tight. A longer period of consolidation is exactly what this market needs in order to restore some pessimism. It takes time, so please be patient.
The reason, or excuse, to sell needs to come from perceived bad news. Yes, I said perceived bad news. This time it came from the Fed minutes, when Fed Bernanke warned that QE3 was no longer likely to happen, at least not any time soon. The market players are absolutely addicted to free cash. When the Fed pulled the free cash machine away in those minutes, the market got sad. Like a little kid disappointed his mother won’t give him any more money for candy at the local candy store. The market’s head is down and it’s in a bad mood.
Bigger picture it’s good news because the Fed is putting a stop to hyper-inflation. He has no choice for now. If he does QE3, we will see 6$ gas at the pumps, maybe higher. That alone will stop the economy cold and cause a recession, so he has switched to the other side and stopped hyper inflating. People are hurting badly in this country. He may be recognizing that he has to stop contributing to their pain. So no QE3 for now, and hopefully, never, and thus, the market is crying for a little while. It’ll mature over time and get over it. Patience will be needed until it gets over its bad mood.
Sentiment is something I always look at. The news comes out once weekly from Schaefer, and he’s been very accurate through the years, thus, I trust his work. The bull-bear spread ended last week at a red flag reading of 31.2%. Not a good number, especially since it was just at 17% not too long ago. Any number over 30% is not great for the bulls. When it gets to 35%, you need to, basically, get out of longs completely. The action this week will start the move back down below 30% again. We could end up seeing the teens again, if my scenario plays out. The longer the market goes without another big blast up, although there will certainly be plenty of up days, the more the masses will get frustrated, thus, causing sentiment to erode more rapidly over the coming weeks and months. For now, the sentiment issue along with the Fed, and no QE3, will be the two catalysts to keep the market from blasting higher overall.
Strong support comes in at 1370/1367, down to 1340, where there is strong horizontal support. 1367 is now the 50-day exponential moving average. It’s quite possible we will lose the 50-day exponential moving average in this process of unwinding. It’s not the end of the world, and will in fact, cause more pessimism. I expect the market will find a bottom not too far below 1340, if it gets that low, and handle out for some time. A deeper scare is always possible if the wrong news hits, but that would roughly be my guess. 2900 is the likely worst of things for the Nasdaq. Patience is going to be key for all of you for some time. Trading time will have to be shorter in duration. No real long-term plays for now. A day or two at the most, whether short or long. Just be smart and exercise great patience and you’ll come out the other side feeling very good about things. Just one day at a time.
Peace,
Jack
