And that had to be expected on some level. No matter how bad the situation is in terms of poor market action, it’s normal protocol to bounce when the oscillators get too compressed to the down side, especially when you study the MACD’s. They are at low levels not seen for a very long time, and that has to be respected from a more positive perspective short-term. You can only push things down so much before you are basically forced to have some upside action, which then unwinds the oversold oscillators. You can get just a small amount of upside while things unwind, but you have to think at some point you’ll at least get things to move higher. If not, how can the market keep going lower into such oversold conditions?
It can happen in a deep bear market, and maybe that’s where we are, but for now, as long as we’re trading above 1249 on the S&P 500, we are still technically in a bull market. There are some bad signs, for sure, and I’ll discuss them as this letter moves on, but we can only go by what is in the moment, and that’s the fact that the oscillators are deeply compressed down. Thus, some short-term upside action is likely. Nothing major but some upside should be the case here. It tells me to keep away from shorts, but that doesn’t mean we go up every day for a while. It could be a very fractured move up, but for now, down side action will be a tad more difficult. Bigger picture is another story I’ll discuss in this letter, but very short-term I have a hard time imagining sustained down side action.
So what would cause the market to just give it up? A huge financial melt down, such as could happen if Greece were to default. There are rescuers, it appears, but only if the country forces changes on their citizens that will likely cause civil unrest. It seems as if it’s a lose-lose situation, but that’s probably what will take place. The country would prefer to stabilize financially, even at the cost of its citizens. If we get some type of financial melt down then I would expect a market mini crash, but for now, I just don’t see that taking place. If it doesn’t, I expect some real chop with a minor upward bias to unwind. If the move up is weak and labored, much as today was, then we can expect to see this market lose critical support, which is 11,750 Dow, 2600 Nasdaq and 1249 S&P 500. If those levels go with some force then it’s lights out for this bull market and hello bear.
When I study the weekly charts it is now clear that the Dow, S&P 500 and Nasdaq are no longer having to deal with those negative divergences. They have completely worked themselves off. The oscillators are totally unwound now. Stochastic’s near 10, RSI’s below 50, and Macd’s getting close to the zero line, although they’re still not quite there. So maybe a bit more work but real close. In addition, coming into this week, the bull-bear spread has come down from 41.6% to 11%. No longer a problem clearly for the bulls.
In fact, another bad week, or two, and we’ll have an inverted bull-bear spread, which would be very bullish for the market. It’ll be very interesting to see what the numbers look like after last weeks action come this Wednesday morning. Will it be under 10% on the spread? Possible, for sure. It doesn’t take long to unwind. Eight weeks to go from 41.6% to 11%. Fear is an interesting beast to say the least. At least the bulls can say that they no longer have the two big headaches to deal with they did just eight weeks ago.
The bulls do, however, have an even bigger problem than sentiment and weekly negative divergences. They have to deal with a daily eroding economy. Severely eroding to be blunt. The velocity from which the economy has fallen down is unbelievable at best. In one simple month we went from healthy numbers on economic activity to recessionary type levels. What in the world happened? Hard to say, but the economy has hit the wall and things are getting bad very rapidly. If the bulls didn’t have the economy to deal with then we would be rocking higher now with those negative divergences gone and sentiment no longer a headache. The move down to these levels would have been an all in scenario.
It’s too bad as things really would have been wonderful in terms of buying stocks for a long period of time with safety. Unfortunately, we have things falling apart thanks to the actions of Mr. Greenspan in the late 90’s and now with Mr. Bernanke making a bad situation worse. Greenspan caused this entire mess. Bernanke didn’t know what to do with it so he made bad worse. It seems like it would take a miracle to get this economy rocking again short-term, but I guess we can always hope there is a miracle out there.
S&P 500 has resistance at 1292, or the 20-day exponential moving average. The Nasdaq has resistance at the 200-day exponential moving average at 2640. Getting through these levels won’t be easy, but if we do then the S&P 500 can run up to the 50-day exponential moving average at 1308, and the Nasdaq can move up to its 20-ay exponential moving average at 2696. That will be extraordinarily tough for the bulls to pull off, especially with stocks such as Apple Inc. (AAPL) in a bear market. Play it slowly and lightly here. Nothing aggressive.
Peace,
Jack
