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Strike Two...But Holding Very Well For Now...

Jack Steiman from SwingTradeOnline.com at 10/14/09


We hit 1080 weeks ago and then pulled back strongly only to blast back up and hit 1080 yet again today. We pulled off that again quite sharply intra day but saw the S&P 500 hold very well overall in to the close with a finish at 1076.

Grinding our way through the 1060 to 1080 gap day-by-day here with the bears able to hold the bulls off but not able to take the market down with any force. If the bears can't get the job done before the big earnings reports, which begin tomorrow, it'll probably only take a good report from Intel Corp (INTC) tomorrow night to get the job done.

However, there is a real problem here. We are in a rising wedge pattern across the board. Higher highs and higher lows, which on the surface seems great, except it's not if it's accompanied by massive negative divergences, which happens to be the case here. It's not if when this will play out with a larger correction in the market. At some point shortly, the market will snap but trying to know the exact moment is extremely tough here as the market has been riding this pattern for some time now.

The problem here is the length of time meaning the wedge is expanding and the divergences on each new high are actually worsening. The rubber band will snap. We may actually go to 100 or so first and that's why you can't short in anticipation of it. You have to see the reversal first or at least wait for the top of the wedge to be hit again near 10,100. Shorting at the top of the wedge should we get there makes total sense I'd have to admit with a very tight stop just above on a closing basis.

When the market does top here you should expect a pullback of greater magnitude than we have seen lately. For now, the market keeps grinding higher with the bears getting more and more nervous with each point we close closer to S&P 500 1080. We got very overbought intraday on the short term 60-minute charts thus the selling yet again at 1080 but that doesn't mean the bulls won't have what it takes to get this deed done.

There are a plethora of company's reporting their earnings that really matter to the street. Google, Inc. (GOOG), Goldman Sachs Group (GS), International Business Machines Corp. (IBM), and Citigroup, Inc. (C), all on Thursday alone. Four giants.

Is the market waiting on that particular day? Or will it be enough to hear what INTC has to say tomorrow evening?

We'll know soon enough won't we. This week should tell the tale folks. With 1125 being roughly the 50% retrace off the March lows from the 1576 highs on the S&P 500, that's always possible and lines up near the top of the rising wedge. It may never get there for if the earnings aren't stellar, we'll see some intense selling without ever really clearing 1080 with any power. Breaching it is always possible. The key is taking it out and exploding.

You notice how tough it’s been for the bulls to take out 1080 for the past month or so. It keeps getting near 1080 and falling back. The grind back up then ensues once again but there's no denying it is a grind and not a fluid push up. This is being caused by those awful negative divergences on the daily charts. It's keeping the big money on the sidelines. If you look at the Nasdaq, Dow and S&P 500 along with just about every other index chart, the nasty divergences are easy to see. Stocks like Apple Inc. (AAPL) and other big cap technology stocks have joined these index plays with poor divergence s on their daily charts.

Even these stocks are now grinding with tiny candle sticks. You can see them clearly over the past many weeks. A sign of topping not too far out there. No guarantee but definitely a red flag one should respect and pay close attention to. The bad divergences aren't only on the MACD's but that is being joined by its brother or sister oscillators in the RSI and Stochastics. When you get these three oscillators diverging negative together, you need to respect what's possible once that kicks in. With the market in a confirmed up trend, you only want to be long unless you get a high volume intraday reversal down or you get to the top of the wedges in place. Be aware of the trend established and pick the moment that's appropriate before playing reverse that trend. Below the wedge tops, which is where we are now and with no reversal sticks in place, you need to stay only long for now.

The Nasdaq has some interesting support here. The last gap up was 2116. We also have, on the 60-minute charts, the 50-day exponential moving average at 2118. Only two points separate some very powerful support for the Nasdaq. This of course will make the job that much more difficult for the bears. A gap alone is a pain in the neck for the bears but when you add a strong exponential moving average to the equation, the job just got that much tougher.

If we lose 2118/2116, the bears will have something to growl about. Not before! Even if the market sells off the wedge top or maybe even before, you can't celebrate if you're a bear unless you can take out the 2118/2116 double support area. The S&P 500 has key support as we know by now at 1060 or the gap bottom followed by the 20-day exponential moving average at 1052. Strong support only 8 points apart. Again, this makes the job more difficult for the bears.

Bottom line is we could obviously see a new high based on earnings this week but the risk in the market is getting more intense with every new high that is not confirmed by the oscillators. The easy money has clearly been made. There is more out there but not like before and the best plays may be too short soon although that is still unclear as I explained above.

Stay with the trend for now which is up but DO NOT GET AGGRESSIVE! Not the place, even if we're fortunate enough to get to 1100-1125. That's only 2-4% away. Nothing great and if we get there, we'll have some of the worst non-confirming oscillators we've ever seen.

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