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Bulls Punch Back...

Jack Steiman from SwingTradeOnline.com at 10/23/09


Just when it looked like all hope was lost for this rally to hang in there, the bulls fought back today in a big way, engulfing the losses from yesterday. Not much news to go on except some good Dow earnings reports this morning. The market gapped down big on the Nasdaq, but the Dow wanted green. The market was bifurcated with the Nasdaq down 10, but the Dow up 40 an hour or so in. After that, the Nasdaq started to reverse while the Dow kept going. The S&P 500 started lower but it too reversed as the banking stocks started to turn up after the downgrade on Wells Fargo Company (WFC) late day yesterday.

By mid-day the bears had once again given up and ran to cover, allowing the market to turn up harder and close basically on its highs. Solid action across the board other than some commodity and railroad stocks. They under performed as you all know too well. However, strength in those financial stocks more than made up the difference allowing the bulls to hold where they needed to today. With the close well above 1075, the bottom of the gap, the bulls can breathe a sigh of relief while the bears once again having to deal with that feeling of frustration that only the stock market can deliver to ones mind set.

As we came in to today's action, after the close at 1081 S&P 500 yesterday, we were precariously close to losing the top of the October 2008 gap at 1080 just captured, and also losing the most recent gap from 1077 to 1075. Losing 1080 and 1075 would be bad news for the bulls for the short term. With the way the market closed yesterday thanks to that inappropriate late day downgrade on WFC, today seemed hopeless for the bulls other than the fact that we were somewhat oversold on the short-term charts, but that's no reason not to take things down if the bears had anything in their arsenal.

The daily charts were overbought thus no excuses. The bulls would not allow the futures to fall and thanks to some good Dow earnings reports pre-market, the bulls held the levels necessary at the open. This didn't stop the bears from trying the gap as we actually touched 1074 before rocketing higher. Once again it shows how tough it is to lose major gap support without actually gapping below it at the open. This is what the bears must do some day to get things moving in their favor. A gap down and run below a critical support level. Then and only then will things become more favorable to them for at least the short term. 1075 remains the next level of massive support for now. 1101 is massive resistance. Above that and we have a shot for 1121 or the 50% retrace off the March lows.

If you take a look at tonight's charts (COMPQ, SPY, RUT, IVY, BKX, SOX), which I'd like to think all of you do, you will see a chart of the BKX or banking sector and just how close it came to a total breakdown, which if it had occurred, would have sent this market reeling lower. When these wedges break up or down, and in this case down, they can really get rolling. It goes very fast thus the market was on the precipice of a major move lower. You can see today's candlestick and how it held up. Good action for the bulls.

The dollar bounced off the bottom of the wedge yesterday and then gapped up today. This was the action the dollar bulls wanted to see and, of course, our stock market didn't. It didn't take long however for the PowerShares DB US Dollar Index Bullish (UUP) chart to start reversing off its gap up highs. By days end it was actually a drop red and well off the gap up open which normally doesn't bode well for it. Will that be the case tomorrow? Will it break down? No way to know. It remains oversold but anything is possible when an issue is on a confirmed sell signal such as the UUP is. This requires the most watching for understanding future action in the stock market. It will have to break out or break down soon as the wedge is getting tighter and tighter.

Bottom line is today we saw the bulls defend where they had. We are now in a range where a breakout is above 1101 S&P 500 and a break down is below 1075. These levels only matter on a closing basis and not intra-day. Tails from below or above can happen at any time as we saw today when we hit S&P 500 1074.

Very dangerous market out there.

Slow and easy please.

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