Correction or Bear?

Jack Steiman from SwingTradeOnline.com at 02/01/10

This is now the question we need to ponder and decide which way this market is headed. There are cases to be made for both and I will discuss that later on. Yesterday I spoke about how we had our first down trend confirmed when we broke down out of a bear flag for the first time in one year. Three nasty days down that went lateral for four to five days and then broke yesterday, especially on the PowerShares QQQ's (QQQQ) or the ETF proxy for the Nasdaq 100. Today was a continuation of that down move after a strong gap up on a phony Goodrich (GDP) at over 5% that was created by an interfering Government that simply won't allow things to play out as they should naturally. They simply prolong things but that's for another time.

We were oversold on the 60-minute charts, thus that was the main catalyst for the gap up but by mid day it was all gone. So now with today's move lower we know for sure we're in a near-term down trend at the very least. Now it's very important to not get overly pessimistic about the mid term or longer term based on the near term action. This market got very overbought on all the major daily index charts and then we had the sentiment issues get ridiculous with a bull bear spread at 37.55 at the top. The combination finally kicked in and now we have to determine whether we're in a continuation of the bear that ended in March of '09 or whether we're in a new bull market that is simply correcting based on what I've just explained above.

The answer for now is very unclear and that's not a cop out. It's impossible to tell until we have our next nice rally and come back down. if that next move down off the next rally does not create a positive divergence on the daily charts then this could very well be a bear market. If it does create a positive divergence on the daily charts then it's very likely that this was simply a correction to unwind that nasty high spread of bulls we just encountered. Only time will tell that tale. If you don't have the patience and play on gut feelings you could get annihilated. Only some time will answer the question with a higher degree of trust and accuracy.

So yes, we did gap up from oversold 60-minute charts sprinkled in with a dash of phony GDP numbers created by government intervention. The thing that told me we should not chase the move up from oversold was the behavior in stocks that had great earnings last night but were printing bearish black candles on their first hour bars even as the Dow screamed up to about +120 early on. Microsoft (MSFT), which was over 30.00 last night and almost touched 30.00 this morning reversed hard. Amazon.com (AMZN) was printing a bearish black candle and KLA-Tencor (KLAC) was getting annihilated off its first hourly bar. SanDisk (SNDK) was down some early on but also was smoked within the first hourly bar. Good and bad earnings were treated the same and that's not good when it's all selling that we're seeing. The earners were just getting ripped apart.

Down went the market as the day wore on with the Nasdaq leading down as the big cap leaders such as Apple (AAPL) and Microsoft (MSFT) along with many others could not bid. With the close below 1084 S&P 500 the door is open for a move lower in to the 1040's unless we simply get too oversold on the daily charts although we all know the daily charts can stay oversold a lot longer than most think possible once you're in a confirmed down trend such as we are. 1084 is now going to be resistance unless the bulls can do something quickly here. Today's overall action did further damage to the bull case here and opened the door to the bears having their way overall for a while.

The PowerShares DB US Dollar Index Bullish (UUP) or the dollar ETF was up strong today confirming the breakout from a few days ago. This is putting continued vicious pressure on the commodity stocks.
They have been falling hard and continue to do so. As the UUP continues to rise in its inverse head and shoulders pattern, the pressure should remain on these stocks for a while so please adjust your trading accordingly. Watch 23.21 on the UUP. As long as that level holds, the commodity stocks will continue. The measurement is a bit over 24.00 if the breakout holds which it should. Today is the third straight day in which there breakout has held and thus it's likely the real deal so hoping it just crashes back down is probably no more than hope.

Now, here's the key. If you ask me what I think I will tell you with honesty that I think this is just a correction. Here's why and it's pretty simple. Sentiment!! Before this week we were already down to a spread of 16.7% from 37.5% just two weeks ago. I would imagine that this week got those numbers down close to 10% or even less of a spread and that type of sentiment will not allow for a bear market. I gather it's not impossible but the reality is that fear is doing the job I wrote about was needed just two weeks with my "sentiment needs correcting" headline. It’s been corrected folks thus I truly believe the market is far from dead and could surprise back up in due time.

For now, we have established a down trend that will very shortly need a strong bounce higher because the daily charts are close to the magic elixir of sub-10 Stochastics and 30 or sub-30 RSI. Shorting here makes no sense. With the 20-day exponential moving average at 1043, it seems a given we'll get there first but it is not a given at all. We may rally before that level gets tagged and then over time hit it. Just because the near-term looks bad doesn't mean all is lost for the market bulls in time. Again, I would not short here based on the daily oscillators. 1084/105 is tough resistance now for the bulls. Let's see if oversold daily charts take back over. I am looking for short-term longs soon and then shorts on the bounce.