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No Follow Through...

Jack Steiman from SwingTradeOnline.com at 02/09/10


And that's what everyone was expecting after that wonderful hammer on all the critical index charts in the last hour on Friday. The S&P 500 touched the 200-day exponential moving average at 1046 (1044 print) and then burst higher. It was the first test in an extremely long time and after losing the 20- and 50-day exponential moving averages, one would think that whichever index got down to the 200-day exponential moving average first would give the market a quick blast higher and that's what happened.

The key is following through on the next day’s action. Does it follow through or just die? It simply died today. It didn't get killed. Nothing bad like that, but where's the follow through that should take place? It was nowhere to be found today. Not what the bulls want to see and puts the recent down trend more in focus. We had the breakdown and retest and then follow through lower. Today we didn't get a follow through higher one would expect and thus the down trend remains confirmed. Yes, things can reverse but the onus is on the bulls to make that reversal a reality. The bears control things for now.

After the close on Friday, it was reasonable to expect the overseas markets rally higher.
When they rally higher it basically always boosts our futures allowing for a gap up out of the gate. Asia had no rally and Europe was surprisingly flat. No big rally overseas led to flat to slightly down futures on our end. No gap up to be found.

After falling early, led by the Dow, the market came back strong, erasing a 70-point loss in the Dow. The Nasdaq went very green, up around 10 points. The S&P 500 also went green. It did not last. Once the market got back those losses, the bears took over and caused a slow but steady turn downward as the day went along. It accelerated in the last hour, allowing all the major indexes to close on their lows. Very poor action for the short-term. The bears stepped up when they had to no doubt. The bulls did not.

The hammer from Friday now a thing of the past. The action today does not mean we fall apart. The closer the indexes get to their 200-day exponential moving averages, the harder it will be for the bears to hold off the fighting bulls who will give all they have to protect those critical 200-day exponential moving averages. A deep close below those 200's across the board open up the bear market conversation. For now all we know is that we're in a down trend that was confirmed when we back tested those lost 20- and 50-day exponential moving averages. From there we continue to fall gradually. The bulls need to now focus on protecting those 200's below current price.

There is a pattern worth noting when markets are in more of a down trend. You often see some early day strength that turns to a churn that ultimately turns to late day selling. This is the pattern that's starting to emerge with more regularity. When the market was rocking in bull mode, we saw some early selling turn in to late day buying. That's when you know you're in a bull. Folks can't wait to buy up weakness. Now we are seeing folks anxious to remove themselves from stocks once we head higher. A change of character worth noting for now. It can reverse back at any time but worth noting as we can watch to see how long this overall process continues, especially if we ever lose those 200-days across the board. If those ever do get taken out, this process of late day weakness will become common place.

We saw some terrible action from the financial stocks today, and in particular, I am watching the action from Citigroup (C). It is now trading at the poorly priced IPO secondary. It was supposed to price at 3.50, but eventually priced at 3.15. It traded down to intra-day 3.13 before rallying back some weeks back. Today was its lowest close in this down turn since the secondary and a close below 3.13 opens the door to much lower prices not only for the stock but the financials and thus likely for the market. Bank Of America (BAC) along with Wells Fargo (WFC) also had terrible days today. JP Morgan Chase (JPM) also struggled although not as badly as those just mentioned. Bottom line is the financials were awful today and when that happens as we near critical market support (200-day EMA's), we have to watch carefully. The financials need to hold here or things will get more than interesting.

We had the first close below Dow 10,000 in quite some time today and the first time since it started to fall from just over 10,700. It has found a way to hold above and losing 10,000 isn't necessarily a bad thing as it's still above those 200's, but it is psychologically damaging to some degree. The bull market carried the Dow over 10,000 and ever since it has been a feel good story to have the Dow back above the 5-digit mark. If it stays below for a while, it will start to become very difficult resistance on any bounce back up.

The real line in the sand for this market is those critical 200-day exponential moving averages currently at 9768 on the Dow. The levels on the S&P 500 and Nasdaq are 1046/2062 respectively. Those levels now become the key to this market future, although, we know they change slightly from day to day. The bulls have their work cut out for them as do the bears. Both sides will struggle to do their work necessary to have their side in total control. The bulls need to ultimately get back through gap and 20/50-day resistance but for now they are more focused on holding the 200's.

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