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Bouncing Off Of Oversold...

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


The masses are now wondering if the down trend is over. A brief interlude to the down side to unwind things and now that this has taken place, it's all good from here. I wouldn't get too bullish too fast here. We're still below the 20- and 50-day exponential moving averages across the board and those will need to be taken out with force before you can get too bullish. A move off of oversold, which we talked about on Friday, was expected. RSI's in the low 30's on the daily charts and oversold on the 60-minute charts. You don't want to get in until you can understand just what type of bounce it is. Trying to catch a quick day trade isn't the right way to play. Making sure things are clear is the way to play and right now they're not. Is this a correction? Just a pullback? Beginning of a new bull or bear? The only thing clear is we had our first move down out of a move lower in one year.

Today saw a bounce on light volume but still well below important resistance. Not a reason by any means to be getting long. You always get bounces. Doesn't mean you run out and play them. We need huge follow through to today's action and if the bulls can pull that off and clear the 20's/50's then we have something. All today did was unwind the oversold 60-minute charts way back up and bring the daily charts back to a more neutral position. Again, all of this on light volume. If you want to be hopeful you can and I respect that but we need a lot more evidence that this pullback thus far has ended.

We gapped up today. The bears made a few attempts to take things back down but the oversold conditions would not cave in. The bulls fought their way through whenever the Dow would pull back to roughly up 65/70. The bears weren't going to step on the pedal knowing that the market was oversold and could use some unwinding. The trend day up held throughout the day although it stalled near the top of its range for the last half of the trading day. Stochastics on many 60-minute charts unwound quite a bit and the Dow chart has worked off 80+% of it MACD off the bottom without hardly any price appreciation. Not the best of behavior if you're a bull at this moment in time. A good day for the bulls but they have a lot more work ahead of them to feel that things have turned. When a market is like this, cash or almost all cash is best.

Please keep in mind folks that when a market changes its behavior after a long run up, you have to respect it. You can't just ignore it. We had our first bearish engulfing monthly candle in January in over a year. We had our first continuation pattern out of a bear flag on the daily charts for the first time in over a year. Both are strong changes in the previous trends in place where any selling was gobbled right up without hesitation. Now we have something different for the first time in a long time thus you just can't ignore that and say it's safe to buy haphazardly here. The monthly engulfing stock and the daily follow through to the down side raise red flags that say extreme caution is warranted here. Can things just turn back up and stay up? It's the market meaning sure it can but that's not normal protocol thus you have to be cautious at the very least. These happenings usually lead to at least somewhat lower prices before turning back up so please keep that in mind.

The PowerShares DB US Dollar Index Bullish (UUP) did get overbought with an RSI tag of 70 on Friday and thus pulled back today. This allowed some extremely annihilated commodity stocks to get a nice bid. Long overdue. The UUP, however, would have to lose 23.21 with force to break its up trend in place and thus getting bullish on those types of stocks as the UUP back tests the breakout is not the best of ideas. The bounce could be very temporary for these stocks. Watch 23.20 closely on the UUP please if you're involved on the long or short side of the commodity world. If it holds above this level and turns up, things could get nasty again in commodity land.

The market is unclear here. Going VERY slow here is the proper and only way to play. There is risk due to the changes in trend we have seen lately. The market can turn back up for sure but the onus is now on the bulls to take back those critical 20- and 50-exponential moving averages lost on their daily charts. The levels being 1109/1107 S&P 500; 2233/2221 Nasdaq and 10,357/10,343 Dow.

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