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Market Hits New 2009 High....Pull Back Time?...Eyeing Some Negative Divergence...

Jack Steiman from SwingTradeOnline.com at 10/19/09


Market Overview

We finally made the move over the 1080 level on the S&P 500. It took quite a long time with lots of close calls that teased the bulls and gave the bears reason to wipe their brows in relief. The gap was on huge volume back in October 2008 thus it really came as no surprise that we failed the first tests up there. With the bears never really able to sell things off, the bulls finally found a way to get the job done. At the same time we cleared 1080 on the S&P 500, the Dow made a run and cleared 10,000. It felt really good to anyone who has a bullish slant.

The real question that's being asked is whether or not we can hold over Dow 10K and above S&P 500 1080. There are some signs that short term, it will be tough for the bulls here. That does not mean that anything terrible is going to happen to this market. Not by any means. It does mean there's a real chance we see some struggle up here and here's why. If you study the daily charts we’ve included in this article, INDU, SPX, NDX, BKX, SOX, and WTIC, you will see some very overbought stochastics.

The S&P 500 and Dow now have Stochastics heavily Overbought at 95. In addition with our new high printed on most Indices we did not confirm the move per most Oscillators. See the first 3 of our index charts--Dow Jones Industrial Average, S&P 500 Large Cap, Nasdaq 100. It can grind a bit higher but that's all. The Dow has four new highs in price with four consecutive lower MACD readings. This normally would bring a bout of some selling. Again, it doesn't mean anything horrific is on the horizon but it does mean the risk for long side plays has increased here. It tells you first and foremost to reign in your enthusiasm.

Now, if we had the negative divergences but we had only a neutral stochastic, then it wouldn't be as much of a red flag very short term. However, when you combine the two, it does say to go real slow here. It's not a situation that says go short with gusto but if we have a labored move back up and the oscillators don't respond, we can short a little bit. The danger being an incredible number of very important earnings reports next week that will move the market around with great volatility. Bottom line here is that we have some very short term red flags that need to be respected by the bulls. Quadruple negative divergences and overbought stochastic's. Please respect this reality and adjust your thinking accordingly.

The real thorn in the side of the bears is unquestionably coming from the behavior of the dollar, which on its best day, can barely get a bid going. Commodity stocks pull back a bit but then find a bid all over again. So many are looking for that inevitable dollar reversal, it tells me we may not see it for quite some time. Always rallies but nothing very sustainable. The PowerShares DB US Dollar Index Bullish (UUP) would have to recover 23.25 to be in good shape again but for now, it's showing nothing but slow erosion day by day. It's a very slow moving vehicle thus to get above there from here would take something very special that's just not out there at this time. With the action in the dollar being what it is, the bulls can hold on to their hopes that this market, in time, can go higher still.

So next week we get week two of the big earnings season. We see Microsoft Corp, (MSFT), Apple Inc. (AAPL), Morgan Stanley IMS), Wells Fargo & Co. (WFC), Burlington Northern Santa Fe Corp. (OBNI), Union Pacific Corp. (UNP) to name a few of about 40-50 big reports. Everything from Financials to Biotechs to Transports to Retail to Commodities. The market will move on these reports. Some will be great. Some will stink. The market will dance with volatility as these are reported day by day. Expect this to be the norm. We've had big winners and losers already and we're just starting.

General Electric Co. (G), Bank of America Corp. (BAC), Advanced Micro Devices Inc. (AMD), International Business Machines Corp. (IBM), A PO Smith Corp. (AOS), Johnson & Johnson (JNJ), Nokia Corp (NOK), Citigroup (C), Landstar System Inc. (LSTR), Goldman Sachs Group Inc. (GS) were all losers.

CSX Corp. (CSX), WD-40 Co. (WDFC), Abbott Laboratories (ABT), Lufkin Industries Inc. (LUFK), Google Inc. (GOOG), Harley-Davidson, Inc. (HOG) were all winners.

More big losers than winners thus far yet the market is holding up pretty well. That too has to be respected. The market seems more forgiving now. Even if something reports badly, it's not necessarily hitting the whole sector. For instance, Landstar System Inc. (LSTR) in the trucking sector was hit hard on their report two days ago yet our trucking play, CH Robinson Worldwide Inc. (CHRW), moved higher anyway.

This is a change of character. One more bullish than anything else. Bottom line is we have to recognize the added risk short-term based on divergences and overbought on the daily charts but there is NOTHING suggesting anything terrible as all of our Uptrend Channels remain well in tact and are far from being threatened at this time.

Sentiment Analysis

There is nothing going on in the world of the put call ratio that suggests we're seeing too much complacency.
Today was a bit low with some selling that took place but still nothing that says we're in trouble on that level.
The bearishness amongst the AAII Survey (American Association of Individual Investors) is actually slightly increasing as the market churns. This is good news for the bulls. Few believe the market can ultimately continue higher. A good tonic for more frustrated bears longer term. The numbers can change quickly but they aren't showing any inclination to do so right now.

Sector Watch

Mixed bag this week on the Sector front. Some of the worst performing Sectors were those which hit the top of their Uptrend Channels during the week. Intel Group (INTC) flamed out after reporting respectable numbers as the Semiconductor Index (S0X) hit the top of our Uptrend Channel mid week and turned down the balance of the week shown in our Banking Index (BKX) Chart.

In addition, some late week poor earnings from some of the Financials put that Sector under pressure late week. See our S0X chart, which may be the single most important Sector to watch in the days ahead. Gold and Silver did not participate this week even though the Dollar was higher as they both took a breather after a strong recent run.

The Transports had a strong week with a favorable report from CSX lifting the Railroad Group. Oil broke out to a new 2009 high out of a 6-month base as seen in our WTIC chart. Other areas of strength included the Aerospace, Food Retailers, and Chemicals.

The Week Ahead

It's all about those earnings I spoke about in this report. The market is thirsting for them. It wants to know the truth about the economy, or at least the truth given by the CEO's. Are things appearing to bottom for good or is there enough doubt to knock this market down. Earnings, as I have mentioned, haven't been great but far from terrible. A few more disappointments than I thought we'd see.

If this continues, this will likely add to the probability of some type of pullback that can last for a few weeks overall. If the numbers come in extremely well, then the pullback is likely to be muted. The scorecard thus far says there is likely to be some bad ones but we'll see. Nothing else is relevant.

Keep a close eye on the Banks.

Earnings or bust this week.

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