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Last Reversal Day...

Jack Steiman from SwingTradeOnline.com at 10/22/09


The market was moving higher throughout the day with commodity stocks leading the way based on the dollar falling apart. It opened at 22.40 PowerShares DB US Dollar Index Bullish (UUP) and got down to 22.26, which is exactly where the bottom of that bullish falling wedge is. A move below 22.25 and we'd have blastoff for this market. 

We were right there when a very well respected analyst, one hour before the market closed, downgraded Wells Fargo & Company (WFC), a major financial, and down it went. Down hard in fact, taking all the financials with it.

As those financials cratered lower, we saw the UUP move up a drop although not much. Those MACD negative divergences finally kicked in hard once the market lost the financials sending the markets down to close at their lows and well in to the red. 

We finally saw a reversal of some type although not from a gap down in the morning. That would put the final nail in the bull’s coffin for a while. That still isn't upon us although critical gap support at 1077 is only four points away. We raced down towards 1077, but time seemed to run out, although some technical damage was done by printing a bearish hammer stick across the major index charts. That candle suggests the probability is increasing that a more sustainable pullback is upon us. The close at the lows today opens the door. 

Now let's see if the bears can seize on this opportunity.

What you want to see, if you're a bear, is for critical levels of support finally get taken out one by one. You have to start somewhere, and the truth is, they haven't taken out a single one yet. 1080 was the top of the gap, but 1077 is now new gap support as the market worked its way higher the past few weeks. If the bears can close below 1077, they're in business. If they can do that, it opens the door to deeper selling for sure. If they do it on a gap and not intra-day action, it makes the move below safer for them as any move back up in to the gap will see major sellers waiting to take it back down. 

Earnings tonight were quite poor from Chipotle Mexican Grill, Inc. (CMG), Ebay Inc. (EBAY), and others. This should help their situation, but as of 7:30 PM Eastern Time, the futures were only a fraction lower.
There's a lot of time between here and tomorrow morning. It's not that the bears can't take out 1077 on an intra-day move, but as I just said, that would be their preference, so tomorrow morning is important for them. 

It's been a great move by the bulls, but we now have a confluence of events that suggest, at leastfive a decent pullback is upon us. Let's go over them. We have quadruple negative divergences on the major index charts. (See Charts: WLSH, SPX charts, BKX, SPY below.) Some only have tripled, but that alone is plenty. The Dow has quadrupled. Nasty for sure. 

On top of these daily divergences, for the first time in my memory, we have five consecutive negative divergences on the 60-minute time frame charts. That's unheard of basically. Let's add in overbought stochastics on the daily charts, overbought weekly charts and finally, we basically hit the 50% retrace across the board. Slightly less on the S&P 500, but fully so on the WLSH, which is the most comprehensive index to look at. These events put together tell us the likelihood is for some weeks of selling overall. Not every day but overall. 

It is also possible we have seen the ultimate top in this market move although that is way too early to say with any certainty. 1101 S&P 500 could have been it but the bulls are still in good shape as long as they can hold the 50-day exponential moving averages as we sell here. Those levels are 2073 Nasdaq, 1042 S&P 500, and 9614 Dow. If those levels get taken out on a closing basis, the market is facing even more of a dire situation. Any and all selling that takes place from here is nothing to talk about unless we can break below those key numbers, so please keep that in mind. 

The dollar came close to breaking but didn't today. In fact, today was the first time in quite some time that they bifurcated from each other. The UUP was down strongly all day but the market finally fell down hard the same time the dollar did. This is from those nasty divergences which had to play out at some point and that time was today. So with the market ignoring the dollar, it may be time for the market to fall, even if the dollar does lose that wedge. I'll watch closely. 

The action today was nasty but not a death knell yet. We can use the selling to try and wipe out those poor divergences. We could also use some unwinding of the normal oscillators such as the stochastics and MACD's. If we lose the 50's then we will know more about the markets intentions. 

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