Bulls Snap Back...Take 50's With Them..For Now...

Jack Steiman from SwingTradeOnline.com at 11/06/09

Are we having fun yet? This whipsaw is classic. It's more the sign of a mature market that needs a lateral consolidation due to the great move it made over the past few months. Mature meaning, upside isn't easy but difficult to kill because the economic news and earnings reports are so good overall. Push and pull which allows a longer term lateral basing pattern to form to cool down the oscillators and emotions from a too bullish perspective. Now, even though we never got overly bullish in sentiment, it never hurts to get the average individual a little more cautious if not bearish.

The last two months have allowed this market to unwind to basically oversold, the stochastics on all the major index charts. It's been one large lateral move that has done some very nice things to those overbought daily charts which are now nowhere near overbought. The charts are acting as if there's no real bad news coming down the road. Earnings have been solid and when this takes the street by surprise, there will be willing buyers whenever these stocks sell some and get to important support zones. The charts, for now, are saying don't get overly bearish, but in the near term, there's no reason to get overly bullish either. The longer the lateral consolidation the better it is for the bulls.

The market started out with a move to the up side today as the futures were juiced by the earnings reports from QUALCOMM Inc. (QCOM) and Cisco Systems, Inc. (CSCO). Economic news acted to give the futures a boost even higher thus we opened with a nice gap up that stalled for a while. Normally, stalls can be a prelude to failure, but not today. We kept on going higher, slowly but surely, throughout the day. A very powerful advance-decline line averaging close to 4-1 was the confirmation the bulls would be looking for. Again, the old story of needing to see the majority of stocks participate on strong up days. No denying that fact today.

The market closed on its highs with the 50-day exponential moving averages all recaptured by the bulls. I talked recently about how the Nasdaq and S&P 500 had closed below their respective 50-day exponential moving averages but weren't running much lower, especially on the S&P 500.
When this happens it shows no follow through and things can reverse. We certainly saw that today. Positive action throughout the day leaving no question to how difficult a job the bears have in front of them. They are losing their grip a bit here. All is not lost for them, but giving back the 50's so easily, isn't what they had in mind.

Tomorrow morning’s jobs report (Friday’s Jobs Report) is really important for two reasons, although we can only get an answer to one of the scenarios possible. It would be great to see what would take place if the report is market favorable and great to see how the market would react if it wasn't a friendly report for the bulls. The S&P 500 is closing in on 1075/1080, which is a back test of the trend line wedge breakdown. It is going to be incredibly difficult to have enough strength to get back in to that wedge, which would be super bullish if it could. The bears will throw everything they have at that zone of resistance should the jobs report be more market friendly.

This is not the time to be getting overly aggressive anything. The lateral consolidation that is taking place is not showing any signs of breaking out or down. The channel is now S&P 500 1101 down to 1029. Anything in between is noise. We're simply trying to manage our way through this channel day by day. We're basically in the middle of this channel so don't get too happy if gap up or down as a bull or a bear. Things are setting up in this channel to buy weakness and sell strength. Tomorrow will be a fascinating day for sure.

Days like today feel so good it's easy to get caught up in the emotion. It makes you feel as if the market can never really fall too hard. but believe me, it's not that simple. Times like these are really important in terms of keeping your cool. Down days feel so bad and feel as if the market is ready to just heave lower. Up days feel euphoric and with greed the easiest of the emotions, you can get aggressive only to find yourself in panic one trading day later.

Channels are tough because it's not as simple as saying I'll wait for the top to short and the bottom to go long. They often stop in the middle and then up some, down some. It's not just now we can wait for 1101 or 1029. So much takes place in between. You try to catch a few plays here and there but you definitely don't want to overdo your stay in anything. Try your best if you're trading to keep things in perspective and understand we're really nowhere in a channel of roughly 7% from top to bottom, 1101/1029.

S&P 500 support remains critical at 1029 down to 1020 or horizontal price support at the most recent lows. Resistance at 1074 and then the back test at 1075/1080. If we get there, you may want to lighten up on longs quickly. Support for the Nasdaq is critical at 2040. The bears tried for a few days there but failed miserably. Resistance at 2102 and 2111. Respect these levels, please.