Is this the time we lose this critical level and just give up the ship? Always possible, but I don’t think that’ll be case, even if we do lose 1131 for a little while. We’re testing down for the third time and that’s often the charm, if not the 4th test. Strong levels almost always hold on the first two tests. After that they can go at any time, if that’s truly their destiny. Is this market destined to head in to the abyss? There certainly is enough of a belief in that scenario. A lot of bearish talk about how bad October is going to be. That may turn out to be true, but for now there is nothing suggesting October is the month we finally say goodbye to the bullish run, even though we have had selling thus far. So let’s discuss why this is happening.
When markets get very overbought, meaning hanging around those 70 RSI levels, or higher, on the major index charts for a long time with stochastic’s 90, or higher, also for a long time, you need to work that off so that markets have a chance to move higher once again. You can’t just keep moving higher without some significant selling to unwind things back down and relieve some of the overbought conditions. Those overbought conditions have been worked off to some degree, but not perfectly. This is why the door is open to a breach of 1131, but again, that doesn’t mean market death.
The RSI’s are in the upper 50’s now, on average, and a move down to the 50 area would be ideal. Doesn’t have to happen, but it “feels” as if it will in time, even if we work a bit higher first. Today gave us the perfect correction, or at least a good chunk of it. It did unwind things quite a bit without too much price depreciation. A good day for the bulls, even though it was a day of selling. Exactly what we needed. Should be some more before it’s done but not too much more. More on that later.
There are many out there pointing out that things have changed to a bullish sentiment. I don’t see it, although it will be more than interesting to see the numbers on Wednesday morning. Whenever I turn on the business channels, I am shocked by the bearish guarantee of how bad things will get from here because you just can’t justify things fundamentally. A dangerous way to think and play. It’s across the board.
Most seem to be riding the bearish camp for now. This tells me there’s still enough healthy pessimism around to keep the markets from falling too hard when pullback’s occur. I am listening closely to what the big guns are saying, and until they all get bullish I will maintain more of a bullish posture for the short -term. There has been more than enough bearish action over the past many years to keep enough pessimism around, it seems, so that’s what I will hang my hat on.
In markets such as these, you have to search long and hard to try and find the right base to put out there as a long play. I avoid shorts in a market that’s in an up trend overall. You often have to be very patient with these bases, but in time, if the market trend holds, they play out to the up side. Many stocks are NOT ready to make another strong move higher as they are at the very top of their bases with some negative divergences, while others are simply on high, straight up poles that must unwind overbought conditions before they can try higher again.
However, I will tell you that many stocks are setting up in beautiful bases once again. Handles are being made on appropriate volume trends while the oscillators do their job of unwinding. It’s hard to get bearish on a market that’s showing such nice set-ups and they’re occurring on every level of this market. Until those great bases start to lose those base set-ups it’s almost impossible for me to get bearish on this market. Don’t over play here. Keep it light with the best base set-ups, so you won’t get shaken out as this handle continues to ship us all around.
1131 is the big one as we know, but you also have the 20-day exponential moving average at 1127. Below that we have the 50-day exponential moving average at 1111 while there’s gap support at 1113. Loads of great support bunched up together making it even tougher for the bears to break it down. It can be done, of course, but the bulls have a lot of protection on their side. 1150 is tough, but nothing will be tougher than 1160, or the multi year down trend line. If the bulls can ever get through it, then the bears will be forced to cover up in a big way. A tough job dead ahead from the bulls in terms of capturing this level, so yet another reason to go nice and slow here. Everything is just noise between here and there. Until we lose 1111, or capture 1160, there isn’t much of anything going on. Slow and easy here folks. Some exposure is fine. Too much is not!
Peace,
Jack
