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Bullish Consolidation Under The Gap Top At 1080 S&P 500 ...

Jack Steiman from SwingTradeOnline.com at 10/12/09


Market Overview:

These are more than interesting times. You have stocks continuing to move higher off the March 666 S&P 500 lows. Every critical level of resistance struggles initially but eventually gets taken out to the up side over time. Each time it fails initially, the bears come out and say the top is in but that just hasn't been the case. The bulls fight and ultimately wear down the will of the bears and move the markets higher.

The bears get frustrated because they feel the move higher is unjustified and really, based on the economy, who can blame them! The economic news of late hasn't been overwhelmingly great, in fact, mostly bad, yet we do not fall. We do not lose critical support but what we are doing is hanging around that nasty October 2008 1060 to 1080 gap that was a prelude to some heavy selling to come.

Why are we able to show staying power around this level without collapsing back down is what the bears are trying to figure out because they are in deep trouble should we break through the top of this gap. The market will very likely run once through, allowing the S&P 500 to clear 1100. See charts 1 and 2 below (Nasdaq Composite Index (COMPQ) and S&P 500 Depository Receipts (SPY)).

With the sellers taken out, the bears will be forced to cover their short positions as the bulls will get very aggressive above 1080 on a closing basis. For now, however, we are stuck in this gap although we're working our way higher, nearing the top. We will keep a very close eye on this level at 1080 on the S&P 500. Anything below it should be treated as such, not a breakout, even if it looks good. Patience. Let it happen. Until then, some exposure is appropriate but nothing aggressive.

So what would be the catalyst for a breakout above 1080? Easy answer. Earnings!! We have some big boys and girls getting things going next week. Google Inc. (GOOG) and Goldman Sachs Group (GS), which are huge later in the week, but first we have Intel Corp. (INTC) on Tuesday after the market closes, and don't kid yourselves in to thinking this one doesn't matter very much. It is HUGE!!! A bad report from INTC and this market will get smoked short term. However, if the news is exceptionally good, spin doctored or not, the market will blast higher, likely clearing 1080.

Then we have GOOG and GS and others that matter in a big way, so folks, this week coming up will give us our answer on this gap. Lots of financials this week, including GS/BAC/C (Goldman Sachs Group / Bank of America / Citigroup Inc.) and that's where the market will be focusing much of its energy. It wants to see how dire, or not, things are at these large institutions. Now don't write me screaming about what's truthful or not. We know much of what we hear can be questioned. Bottom line is what's reported and how the market reacts to it. Accept that reality and adjust to that.

Buckle up as this week brings some closure to this market. We'll know if 1080 was all we could get. There'll be no more questions about where this market is headed by weeks end. It should be very clear. Let’s see if we get the blow outs or we get the bears rocking. Remember, there's a lot of good news priced in to these stocks already. They are going to need special numbers. Can the big caps deliver? We'll know in a few short days.

Because the market hasn't collapsed it feels as if it has blasted higher. It hasn't. We are trading below the September highs of 2167 on the Nasdaq and 1080 on the S&P 500 even though the dollar PowerShares DB US Dollar Index Bullish (UUP) has fallen quite a bit since then. The reason being, the selling that took place, the hard selling in a short period of time, once the market did hit 1080.

One could make a good case that the market is diverging from the action in the dollar even though it does trade off its movement. With the dollar at new lows before yesterday, but the market not at new highs, it tells just how difficult it is to break out over key resistance levels the bears don't want to lose.

The market is grinding. The reason it's grinding is because the daily charts have some terrible looking negative divergences on all the major index charts (Nasdaq Composite Index (COMPQ), S&P 500 Large Cap Index (SPX), US Dollar (EOD) Index (USD), and Shanghai Stock Exchange Composite (EOD) Index (SSEC), not to mention all the major technology and financial stocks. (With the exception of Diamonds Trust Series I (DIA) chart, which shows it to be holding its own at the moment.)

From seminars I've taught throughout my life, normally I would have told folks to short with abandon for the past three months. It's been literally months that these divergences have been in play.

So why didn't I short?

Because every time we got to key support levels, instead of breaking as the divergences would suggest we would, they simply didn't.

I also teach to AVOID shorting against an established up trend until that trend is broken. Whenever key trend lines were tested, they held. Whenever the 50's got tested, they held, even if we got there on some nasty high volume selling. It would look bad but it never turned out that way. Also, with the dollar down trending, I wanted that to break out with a reversal before going short. If the dollar would break out on a reversal, it would have told me the market would have snapped. It just never happened thus no shorting for all intents and purposes.

Sticking with the trend is truly the only way to play the stock market. So where would shorting come in to play? What levels would need to go? The 20's again, if lost for a second time, would be a red flag for the market and say some shorting can take place. Nothing aggressive for that would only happen if we lost the big kahuna, the 50-day exponential moving average. We've been above those numbers across the board on a closing basis for quite some time. You have to get below the 50's bears to get some real down side traction.

We're trading in a narrow range for now that should be gone this week as I mentioned earlier in this report. The range is narrowing daily because the 20-day exponential moving average is still rising daily. It has slowed but it's still rising. It's up to 1050 on the S&P 500 and 2096 on the Nasdaq. These 20's are very important support. If they break again based on earnings this week, it is likely we're going down for another test of the critical line in the sand 50's. The top is 1080 S&P 500 and 2167 Nasdaq. A 3% range now on the S&P 500 500 of 1050/1080. It can't and won’t last forever.

If we lose 1050 S&P 500, the 50-day exponential moving average comes in at 1025. That level rises slightly every day as well. If we lose 2096 on the Nasdaq, its 50's come in at 2041 and, of course, rising slightly every day. Let these levels be your guide folks. If we take out S&P 500 1080, 1125 is very possible, pretty much a 50% retrace off the March lows from the old 1576 highs. Bulls and bears both should relax here. Let's see what breaks based on the earnings this week. 1080 or 1050. Let it come to you.

Sentiment Analysis:

It's very important to keep an eye on how frothy or not the market is getting in this bull run off the March lows. When you've come up from 666 to 1071 you would think that the market is frothy bullish. However, keeping in mind the psychological damage done to the average person/trader/investor, it's not surprising to see the AAII Survey (American Association of Individual Investors) this week show that there are still 6% more bears than bulls. There is not even a hint of too many bulls at this point in time. That can change dramatically over night but that would now require a breakout over 1080 S&P 500.

There is no evidence whatsoever that we're too far ahead of ourselves from a bullish sentiment perspective.
You also see that daily from the put call readings that are updated every thirty minutes of every trading day.
No extreme readings of complacency which occurs when you see readings of 0.60 or lower. Just not there.
There are enough bears out there to keep things moving along or to this point, prevent the market from losing key support.

Sector Watch:

Strong action this week in most Sectors mirroring the major Indices. With the market up 5 straight sessions in many Indices most Sectors followed. The Commodities got a continued boost from the fall in the Dollar as can be seen in our 5th chart below (US Dollar Index (EOD) (USD). Oil continues to trade in a range from $65 to $75 and is setting up in a nice looking basing pattern. Most Oil stocks continue to perform well especially those in the Oil Services area.

Gold broke above the $1000 mark to hit some new highs out of a 2 year base. The Transports and Financials both firmed up off their Rising Support Lines off the March Lows. The Aerospace, PC, Retail, and Food Wholesalers all put in strong showings for the week. Until our rising support lines and/or 50 EMA's get taken out with conviction, most groups remain in strong up trends.

In addition, the Shanghai seen in our 6th chart below (Shanghai Stock Exchange Composite (EOD) Index (SSEC)) has now put in two bullish tests of our 50 EMA on the Weekly and looks set to turn back higher soon.

The Week Ahead:

Very little to add. It's all about earnings and then more earnings and then even more earnings from key stocks that tell us about how the world economy is progressing, or not. INTC, GS, GOOG, C, to name just a few. We at least should get resolution which is all any one of us is looking for. It's getting old and boring watching the market refuse to break down or break out whenever it appears it's about to take place. If we are forced to short because of disappointing earnings, we will do it. If the market clears 1080, we will add to our current long exposure.

Fun stuff ahead, whatever happens.

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