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Bear Flags Break Down...

Jack Steiman from SwingTradeOnline.com at 01/29/10


The question becomes for the masses, does that matter very much or is it really not very relevant? Let's discuss what breaking down from bear flags can and usually does mean. If we go back to the March lows of 2009 we can see there was never a time during a pullback where the market basically stood still and formed a bear flag. Pretty much right back up once we had some selling.
Strong hollow black candles which left little doubt about what was taking place. All selling was being gobbled up in a big way. No flags at all. When we started our big selling earlier last week we fell hard for three straight days and wiped out two and a half months of gains. Not a problem for the bigger picture. No down trend established. However, and for the first time, we started heading back up a bit but with small sticks and near the bottom of the last big down candle. No strong impulse up.

Today we started breaking down from bear flags. Nothing horrific. Not the end of the world candles lower but breaks nonetheless. The flag can be captured back by the bulls with just a little good news but we have to acknowledge the fact that some of these bear flags did break lower to some degree. Again, not death to the bulls but something we haven't seen in one year thus you have to take notice. The Q's were the most noticeable in terms of breaking its bear flag. If we get strong earnings tonight from Microsoft (MSFT), Amazon.com (AMZN), and KLA-Tencor (KLAC), we could see that break lower move right back up tomorrow. Some change in character took place today and we have to accept it as such but by no means is it death to the market if things can be captured back quickly by the bulls.

So why do I think it's possible to take things back? Earnings plays a part in that thinking but also we are starting to see daily and 60-minute charts get oversold at the same time. Stochastics remain oversold but not the RSI and it's always best on the daily charts if the RSI confirms the stochastics. Not the case here as most RSI's on the major index charts are in the upper thirties. 30 or lower would be the proper confirmation. With today's late rally off the lows we don't have the sixties at oversold any more but are more close to that than anything else. One more strong selling episode would get everything aligned. Only time will tell us if that's in the cards.
Markets don't often give entry. Let's see if this time it does by aligning all the time frames at deeply oversold on all the key oscillators (Stochastic's/RSI/MACD).

The PowerShares DB US Dollar Index Bullish (UUP) or the ETF for the dollar did break out today but again it's not a rousing breakout although a breakout and that has to be respected. Sometimes breakouts can grind their way higher but that's not normally the best way to go about it. A breakout and run is healthiest and the most trustworthy. At the same time, some of these commodity stocks are getting aggressively oversold so we have to take this breakout with some trepidation. It's not totally clear. Again, on breakout but barely so and struggling to power forward.

There is one troubling event that continues to take place these days but especially so today. We are seeing some massive sell offs in some major leading stocks. It's becoming an epidemic when earnings are reported, even in many cases if the report is great. The stocks being too full. In other cases, some earnings are not great but they're not selling off just a little bit. They are getting crushed. Stocks like Potash (POT), Motorola (MOT), and Qualcomm (QCOM) come to mind today. There are loads of others. If stocks sell so viciously they don't just snap back. They're selling off on massive volume and thus they are going to struggle for some time at least. If they struggle, then it's likely the market will not be easy with regards to the up side. It'll be so interesting to see how AMZN, MSFT, and KLAC are treated tonight. You don't want to keep losing leaders. All three are leaders in their sectors are heavily weighted.

Bottom line is we're oversold again on the short-term charts. Can be a reversal rally at any moment, but for now, with some key index charts losing their bear flags the trend is down. If the daily charts can get significantly oversold along with the short-term charts, that's where we can get a strong reversal back up. For now we have think mostly cash to all cash until things set up. I know that's no fun but this market is changing its trend from what we've seen over the past one year. Is it real? Just a blip meaning a quick correction? is it more? Only a bit more time will give us an answer.

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