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Battle Lines Are Set Up...

Jack Steiman from SwingTradeOnline.com at 02/04/10


The bulls lost those important 20- and 50-day exponential moving averages nearly two weeks ago and are now in the process of trying to back test and break back through. The real question on everyone's mind is whether the market is broken for good or whether the market is going to roar back and March higher. Good cases can be made for both sides to be fair. The bears can claim that the market made its first breakdown out of an initial thrust down in now over one year. That was a nice change of trend for them. The bulls will counter with the fact that we were very overbought and thus one initial break lower isn't anything to be overly concerned about as long as that move lower helped unwind the overbought daily oscillators and also as long as the market created some fear among investors and traders.

Both were successes as we've sufficiently unwound that sentiment and the oscillators are now either neutral or still slightly oversold on those daily charts. If the sentiment had remained overly bullish and if the oscillators hung up near then top of their recent highs then the bears would be in fabulous shape on that front. That didn't happen and at least the bulls can feel the selling wasn't wasteful. In addition, the bears can feel good in that the selling volume was quite heavy as we pierced through the 20- and 50-day exponential moving averages. You can't argue with that reality under any circumstances.

However, when pullback's or corrections occur at extremes, often you see this type of volume as everyone runs for the exits at the same time. Remember, fear eats greed's lunch and that fact is without exception. It's harder to be greedy if you fear the market will rip you apart. Lighter volume is occurring on the way back up for that very reason. Folks are now a little more fearful than they were two weeks ago. Bottom line is that both sides have their way of looking at things and thus its war. The battle lines are set. The bulls need to take back 1108 where the 50-day exponential moving average sits. The bears will do everything in their power to make sure it doesn't happen.

When we study the 60-minute charts we can see that there are loads of inverse head and shoulder patterns set up which of course, if they play out, are quite bullish in nature. They're fairly large as well and thus attention must be given to them. They're not just small little patterns with little meaning even if they play out. They're large enough to get everyone's attention and the pattern is rather symmetrical. If they play out, the S&P 500 would go up near 1140; a very decent move from here and thus it would also capture back those 20- and 50-day exponential moving averages. The fact that this pattern exists in the largest of all indexes, the WILSHIRE 5000 is very important. The greatest number of stocks is setting up this pattern. There are NEVER any guarantees that this will play out but the pattern is so perfectly developed you have to give it the respect it deserves.

When we study the daily charts we see that the stochastics are just trying to make a bullish cross. The fast-line or the black-line has crossed over the slow-line or the orange/red-line depending on your computer. When black is over red that usually means higher prices are to come, especially when the cross takes place at very low levels. The stochastics are only in the low 20's overall and that's low folks. There is plenty of room to run if this market wants to get rocking. If stochastics were already at 50 or higher it wouldn't be as good but when you get crosses at low levels, that's usually more bullish than not for the short and medium-term.

Earnings continue to be solid overall even though the market has been in correction/pullback mode. There are also debacles. Plenty of them, in fact, but overall, the news is good. Tonight we had solid earnings from Costco (CSCO) and VISA (V), two important market stocks, and their stocks are up after hours. Again, there are bad ones, such as Broadcomm (BRCM), this evening, but overall, the news this quarter has been good, and this too, is reason enough for me to believe the market can pull back but not crash out as many are predicting.

Look folks, it doesn't get tougher and thus the reason for so little lately. Safety first approach. I do believe this can go either way, but I do like the way the daily charts are setting up and I also like the patterns setting up on the 60-minute charts. This market, however, is trading below the 20's and 50's across the board and taking those levels back isn't going to be easy, thus buckle up and understand what's happening and be patient, please.

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