This was a very interesting, and a fun week for the stock market. Things didn’t start great with the S&P 500 losing key support at 1101, breaching as low as 1074 intraday. No fun for the bulls, but there were shouts of joy coming out of bear land. Then a wild reversal off 1074 took place and the lows were in for the week. A powerful close that day, which led to further rallying into today’s open. From today’s gap up we saw the Nasdaq start to lag, which coincided with the 60-minute charts getting overbought on all the key oscillators from stochastics to RSI to the MACD. Then the market started to fall from there, although nothing terrible. We’re so used to the bear market these days that any move down feels like the end of the world to anyone with a short-term bullish bias. We are in a bear market and you need to remember that, and don’t expect the market to stay overbought on the short-term 60-minute charts. It can happen, but it’s not normal to do so, thus, the unwinding began.
Nothing to lose your mind over, but you have to respect some selling as a part of the short-term, even though that short-term is more favorable due to sentiment being way too high on the bearish side. Not only did those 60-minute short-term charts get overbought, but the Nasdaq 100 had been underperforming since the market opened for trading. When the risk trade is off, you can’t expect 100-point plus gains on the Dow to hold all day. At the same time, you shouldn’t expect the market to fall apart. Not for a while to come. That doesn’t mean it won’t happen down the road, or that we won’t sell some early next week to unwind further. It just means it won’t be easy for the bears to rock this market lower for the short- to mid-term until we see some real optimism. So today fit in nicely with what one would and should expect. Overbought selling off, leaving the day’s highs in the rear view mirror, but at the same time, nothing too terrible in terms of selling back down.
The one thing all of us should look at carefully today was how, basically, all stocks, and all the major indexes, stopped dead cold at resistance in the form of either the 20-day or 50-day exponential moving averages. In a bear market, it isn’t easy to clear back through those tough moving averages acting as nasty resistance. Because of the sentiment issue in this market, I think, the odds are solid that we will get through some of these moving averages, if not all of them, but that still won’t make it a bull market. Please don’t forget that. If the market is going to get optimism, I think, it has to over the coming weeks. Clearing those moving averages is going to have to happen at some point, although, it can take many attempts before actually breaking through. If it weren’t for the sentiment issue facing this market, it’s unlikely this market would be able to get through these tough resistance levels. But I do believe we will in time. Getting through should ultimately be a head fake, but would give the market the energy it needs to unwind the bearish trade currently at -10.8%, more bears than bulls. A rare number, indeed.
The semiconductor stocks are acting very well off the lows with some real force behind the move on the oscillators. All of this on the daily chart. I don’t want to let one area of the market have too much influence, but it’s never a bad thing to have these stocks rocking up. They are economic leaders, thus, it’s good to see them move. The other laggard, the financials, just can’t get going. Goldman Sachs Group, Inc. (GS) was down 5.24 today, JPMorgan Chase & Co. (JPM) was down along with many other financial stocks. That’s totally understandable considering the headaches here in the United States, and in Europe, especially. The reason for my taking an interest in these stocks is because it may be giving me a message to confirm my thinking. That the market won’t crash out for the rest of this year. Lots of swings up and down, but nothing terrible due to the need to get optimism rocking. The semiconductor stocks have been lagging. However, if they can now keep a more sustained bid, this would likely help the overall market bid up, and therefore, raise the optimism needed. I am going to keep a close look on the behavior of these stocks, but the daily charts on them is beginning to look more favorable. If they can do well on the oscillators on the next market pullback, that will bode well for the overall market for the rest of 2011. Nothing too great for the market, but an uptrend overall and no new breakdown.
The action this week allowed the market to remain inside the bear flag. It broke down briefly, with that intraday move down to 1074 on the S&P 500. It’s how we close, thus, we are now nine weeks complete, and the bear flag lives on. It looked dire for the bulls when things broke, but then came the -10.8% bull-bear spread, and then the reversal took place. This bear flag may remain mostly in place for the rest of the year. Lots of swings up and down, and back and forth to drive the masses insane from an emotional perspective. We may ultimately move a bit higher than the previous top near 1235 in time. That will take time to get there as well. This is still not a healthy market, nor is it a bull market. It’s a bear market that simply has too many bears in the moment to give them much satisfaction in the short- to medium-term. That should work itself off over time. Probably over a few months, but we’ll see. It could be faster than that if things move up quickly enough. Until things clear up in Europe in a positive way, and until our own country can start showing economic growth that’s sustainable, there’s nothing to get excited about with this market. Let’s play what’s given. For now, that’s the too many bears trade, so buying weakness, and not doing so aggressively, is the best strategy.
Peace,
Jack
