Selling Accelerates...

Jack Steiman from SwingTradeOnline.com at 01/22/10

When sentiment needs correcting, the only way to really do it is to shake the tree.
If you get small drips and drabs it is quite unlikely that you'll get scared out of the market. You'll look at every small down move as a buying opportunity. The only way to change that thinking is to make things look bad. Really bad. Scare you bad. To make you think twice about buying those dips and to get to the point where you won't buy the dips. Where your reaction to downside will be I am not touching that. It has to go much lower from here. When this entire process has taken place and moves the average trader to say I've had enough, only then can we talk about getting to where we need to be. Up until last week, all we had was a fearless trader. A bull bear spread of 37.5% spread at the top. Now down to 33.5% heading in to this week. You can bet the tide is turning there.

The only problem with sentiment is that it's NOT an exact timing mechanism. You have to stay with the trend in place until the turn occurs. Remember, we had some strong plays in to that heavy bullish sentiment. We had four consecutive weeks of a 30+% spread yet it took until we got to 37.5% before the downside action ensued. Sentiment at extremes will turn the tide for sure but it's untimely as an exact way to play. If you had other circumstances involved it becomes a little more precise but we didn't have enough thus you stay long until you get the turn but you tone the number of long plays down. We did that.

We started the day out with a split market as the Nasdaq was up based on strong earnings reports from F5 Networks (FFIV) and Ebay (EBAY) to name a few good reports from last night. It breached the gap down from yesterday at 2304 by a few points and then turned lower. The S&P 500 and especially the Dow were already struggling once the market opened. After roughly 40 minutes of action the market turned down hard. A real blast lower aided by the President of the United States putting major restrictions on trading by the large financial firms. Stocks like Goldman Sachs (GS) were down 2 at the time of the announcement but within minutes it was down 11 before closing off those lows. The market plunged further due to this announcement by our President. We closed near the lows and very oversold on the short term-time frame charts. Oversold can stay that way but the selling was hard enough all day, a trend down day, to allow the very short-term to get oversold. Nasty action that probably made most if not just about all of you question the up trend that was just in place a week ago. The job is getting done.

It always seems to come back to those financial, doesn't it. The problem child is having fits again. The President told the financials that they can no longer go to the candy store alone. That a parent needed to be with them at ALL times to make sure their behavior will be appropriate for after all, when left alone in the past, they proved they couldn't be trusted and everyone is sick of that. Restrictions mean lower profits, which, of course, those large cap banks in time will make up for by charging all of us higher fees. Count on it. For the moment they are going to have a hard time based on these restrictions that will likely be voted in to place to appease Main Street folks who are really sick of Wall Street. Who can blame them really. The financials started this mess because of a lack of risk appropriateness and now their hands are tied and longer-term that's good news for everyone, except for those banks, of course, because they'll scream it's unfair.
Too bad guys!! Keep crying!!

So where are those oscillators. Let's go over everything once again step by step. Where it began at the top. Where it was yesterday and where we are after today's action. The Dow started out at stochastics 100 and RSI at 65. Yesterday it went to 73/54. Today it's at 53/42. Not enough folks. Just not enough. Doesn't mean we don't have up days here and there but we need to see sub 20 stochastics and sub 30 RSO. The S&P 500 started out at 100/68. It went to 74/55 yesterday and closed today at 56/45. The Nasdaq has seen its journey begin at 100/70. It went to 54/54 yesterday and closed today at 45/49. Nothing has gotten to where it needs to. A start for sure but not oversold folks. More selling will be needed. We'll probably need to break the 50-day exponential moving averages on many of the major indexes to get things where we need to and if we do, that'll only get the masses more pessimistic.

Now, with everything I have written, is it possible I'm getting this totally wrong? Yes! We may have seen a long-term top based on sentiment. I'm not seeing it that way at this moment in time, but I will be very careful not to put out plays if things do not set up. I'm not locked in to any type of permanent minded thinking. I will adjust to whatever sets up. I am only giving you my analysis based on what I'm seeing.
There are no guarantee's about anything. I think once we sell off hard enough and start ultimately putting in positive divergences on the daily charts or at least the 60-minute charts, we will set the bottom and start heading up once again. I will guide along as we go and I will be ultra careful not to put out longs if it's not right to do so just because I have a belief system to what's setting up here.