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Market Settles In To A Range....Lateral Base Continues...

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


Market Overview:

We have a market setting up in what is clearly becoming more of a longer term lateral consolidation off the huge move up from the March 9th lows. Longer term lateral consolidations are usually what take place after a strong move has been made one way or the other for a prolonged period of time. We had a huge move higher, and instead of just quitting and rocking lower as many are calling for, this market is confusing the masses by setting up a whipsaw lateral consolidation that is playing heavily on the emotions of those who over trade.

Today was the day when the bears finally got the bad news they were looking for when the unemployment rate hit 10.2% after expecting only 9.9%. Double digit unemployment is awful news, of course, and this is where the bears should have been able to seize the moment. The fact that they couldn't tells me more and more that this is a consolidation that is going to continue for some time. Could be quite some time.

The key thing to remember is that consolidations bring out the emotions in full force and often to the detriment of traders. The range is defined by S&P 500 1101 down to 1020. 8% range and that's pretty wide and loose. With stochastics down at the lower end of the range on the daily charts, and with MACD's having unwound quite a bit, I don't see any likelihood of a breakdown, although, I am hearing so many predict the end of the world. I think they're wrong. That could change in time, but for now I don't see it. For now I see a range that will allow for trades. You'll just have to be nimble. You'll have to be sure not to over play. Keep it simple.

We are close to back testing the breakdown from the 1075/1080 S&P 500 wedge and when I study the charts I don't necessarily see a market ready to explode back in to those wedges. In time I get the feeling we will get back in them, but for now, I don't see the "energy" needed to rock back in them. The MACD's on the daily charts have unwound beautifully but they have not shot back up with this latest move higher. If they were, I'd be convinced we're about to run up again, but they're not and that's a red flag that tells me we're going to be rolling around for some time. It's not bad because any selling will create deeper pushes down on the MACD, and the lower they get without the market breaking down, the better the chance for a stronger move back in time. With markets that unwind the oscillators but aren't showing a lot of relative strength, it tells me we are in range land and thus this is how we will have to play until that all changes.

Let's discuss what the lateral consolidation likely means for this market, although, we know there are no guarantee's to this outcome because news hits and things can change from both an earnings perspective and an economic news perspective. However, after a long move higher, in this case, seven months, and you start to move sideways near the 50-day exponential moving averages, which is very normal to test after any large move higher, it says the next larger move is likely to be one that matches the one before it.

We all know it was a move higher, and I'm not suggesting anything close to that type of move, but in time it says to me that up would be the more likely outcome once this range gets broken. I will remind you that as I said above, that does not look to be any time soon. I think we meander about in this 1020/1101 range for some time longer so patience will be needed. I guess the bigger message here is, I am getting a lot more confident that the gloom and doom many are painting has very little chance of taking place. Like I said earlier, that can change, but for now, I am thinking that higher in time will be the way while we continue our lateral consolidation.

The 50-day exponential moving averages continue to be something to watch. They really are the key to all of this thinking. Markets fall while the 50's rise to meet price. This is how you get the test of them. Buyers need to defend and if they do as they are doing so now, this says the market is still healthy from a bullish point of view.

Support remains 1020 on the S&P 500, which is horizontal support from the last important low, while the same holds true in terms of horizontal price on the Nasdaq, and that level is 2040. We've had breaches intra-day but no closing prices to say things look dire for the bulls. Massive resistance is up near 2200 on the Nasdaq and 1101 on the S&P 500. You can forget about those levels for a while folks. With lateral play in effect, I would NOT be playing aggressively, but you can definitely play the range when divergences set up bearish or bullish on the 60-minute charts and when we get very oversold near support or very overbought near resistance. Lateral doesn't mean you can't get involved. You just pick your spots and keep things light.

I would suggest that you all learn to do something else. Learn to stop listening to all those people that march on CNBC and the other financial stations. They have their self interest at heart in most cases. You hear two things mostly. We're going straight up because everything is perfect out there. Or you hear gloom and doom because the world is falling apart. Neither is accurate in my opinion. You let the charts talk which takes the emotion out of the equation. Try as hard as you can to be peaceful and lose those intense emotions that can ruin you in this game. A down day of 40 points on the Nasdaq doesn't necessarily mean doom. An up day of 40 points right here doesn't necessarily mean we're about to break out. Whipsaw lateral consolidations can really play on your heart strings. Breathe and relax. I'll get you through it.

Sentiment Analysis:

This is HUGE! Why do I bring up emotions so often? Look at last week. We had some bad days. To show you how fast things can turn, we saw a gigantic change in investor sentiment. We saw a rise in bearishness of an amazing 13.2%. We saw an incredible drop of 11.4% in bullishness. A turn of a stunning 24.6%. That truly is amazing. In addition, bulls are now down to 22% and bears up at 56% or a 34% differential of more bears. Yet, another reason why I see this market having almost no chance of falling apart.

Sector Watch:

Strong week for many Sectors with the broad market up in excess of 3% for the week after being down 4.5% the week before. The Transports were in focus thanks to the buyout of Burlington Northern (BNI) at a significant premium by Berkshire Hathaway (BRK-A), which sent the shorts packing for the exits (see our 5th chart below). Other areas that saw strong moves included the Aerospace (see 6th chart below), Biotechs, Internet, Restaurant Group, which broke to a new yearly high among others. The Commodities were mostly mixed while the Semiconductor and Financials lagged some on a relative basis. The Shanghai market continues to catch our attention as it firms up off major Support and continues to setup in a large basing pattern. Should this break higher in the weeks ahead our market is likely to follow so it needs to be watched.

See all charts below: WLSH (Wilshire 5000 Daily), COMPQ (Nasdaq Daily), SPX (S&P 500 Daily), SPY (S&P 500 SPDRs Weely), DJUSAE (Dow Jones US Aerospace & Defense Sector), TRAN (Transport Daily). I’ve added one extra chart today, SPX (S&P Large Cap Index) showing the lows as well as the high for October and November.

The Week Ahead:

The week ahead shouldn't be too intense. Oh, you'll see your share of moves up and down and we can still test down to 1020 in time on the S&P 500. For now, I would tell all of you to continue doing what we have been doing successfully overall, and that is, to pick our spots for more plays but to not play heavily. Whipsaw in the range is likely to be the story week after week for a while. That's fine. We'll do our best to make it work out.

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