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Market Trying To Carve Out A Bottom...

Jack Steiman from SwingTradeOnline.com at 02/15/10


But you know it won't come easy folks. Once we broke down below the 20- and 50-day exponential moving averages, back tested and fell again, the trend changed from up to down. breaking trends, once in place, is not an easy chore. So you try to look for small clues that suggests that if the trend hasn't changed yet back to up, it is certainly trying to put in a low for this strong move lower off the 1151 top on the S&P 500. A process that can feel like you just sat in the dentist's chair for a few hours. It leaves you stunned and battered. At least that's how I feel when I go to the dentist.

Violent swings up and down that feels good in one moment and not so good the next.
The action is getting very violent here. So where do we look for those clues regarding the fact that the low is likely in on this correction. One area I look at is the action in the PowerShares DB US Dollar Index Bullish (UUP) or the ETF representing the dollar. It has been on a tear to the upside the past month plus and has taken the market down with it, especially many of those commodity stocks. Then UUP has been straight up but today it printed a nasty black candle meaning it gapped up but closed lower than the gap up open. Strong on balance sellers after a huge run up is usually the end of that trend, at least for the very short-term.

In addition, its oscillators have risen way up to the top of their channels and the stochastics are printing a massive negative divergences. No bad divergence on the MACD but clearly one on the stochastics. This combination of high oscillators, a black candle and negative divergences on the stochastics tells me that the worst of the market correction has already taken place. Of course, there are no guarantee's and this is why you still have to have your guard up but you have to go with the message being sent. Also remembering that it doesn't mean the whipsaw is over. It won't be easy but that's my thinking.

Let's discuss why I think today's black candle on the UUP means we should have at the very least an equities bounce. Black candles represent reversals ONLY when its come off a long and explosive move higher on any stock or index chart. If you study the UUP chart you will see that it has made that very powerful move and then the black candle today. In addition, the black candle is most accurate when you have RSI's at very high levels, usually 60 or higher. it occurred today at roughly the 67 level, very close to that magic 70 number. In addition, to cap it off, black candles work best when there's some type of negative divergence on the daily chart on one of the major oscillators. We have that now on the stochastics and they're from high levels as well. If black candles occur at the lower end of the oscillator trail they're not very useful. If there's no divergence negative or no strong move in place they're also useless but again, there's a lot of evidence that this black candle is significant and should at least offer a bounce in equities early on next week.

Today the market opened lower with help from overseas negative news from China regarding bank regulations. A good retail sales report pre market couldn't help the futures recover. We opened lower and ran down hard with the Dow down approximately 160 points. Ugly and it looked to be getting out of hand. The Nasdaq was down roughly 20 points but one thing was clear from the start and that was that the Nasdaq was performing better than the S&P 500 and Dow and when this happens there's hope.
Just when things looked bad the markets started their reversal higher. This coincided with the black candle getting started on the UUP. The lower the UUP went, the higher up the market went.

As the day came to a close, the Nasdaq closed basically on its highs while the S&P 500 and Dow were down but well off their intra day lows. On this push down we wound up putting in a higher low and that's a positive as well. The Dow and S&P 500 also printed hollow candles and also printed inside days. Never a guarantee but the evidence points to higher prices early next week. The market did well for itself today although it's far from out of the woods as there's all kinds of resistance from gaps to moving averages not far above today's closing prices.

2190 Nasdaq and 1090 S&P 500 are gap levels this market needs to take out. it's a good thing we took out the gap downs from today with the late reversal or we would have had two gaps to get through and we all know one can be hard enough for the bulls once a down trend has been established such as we have now. If we can get through those gap levels at 1090/2190 then we can deal with the next headaches, the 50-day exponential moving average at 1097/2202 on the S&P 500 and Nasdaq respectively. If we get through those levels then we can move appreciably higher. The 200-day exponential moving averages are still the final line in the sand for the bulls should things head much lower once again. 1066 and 2047 those levels and for now they're not in danger but we have to keep an eye out just in case.

There are lots more stocks near the bottom of their oscillator cycle or wedges showing some positive divergences on their daily charts along with those oversold stochastics and RSI's. This too is reason for hope for at least the short-term here. When you get the majority of stocks down to levels just explained, it's hard to continue to press on them to get lower prices still. They're oversold and need to bounce up at the very least. Add in sentiment which has turned from a bearish signal to a more bullish one, there is hope that this whole move down was simply a sentiment correction I spoke was inevitable before it occurred. 37.5% more bulls was too high. Now it's 8% and maybe lower. Nothing is etched in stone here but I do think we have a good chance at moving higher short-term. Stay nimble.

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