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We Look Range Bound..... For Now...

Jack Steiman from SwingTradeOnline.com at 11/13/09


The market got to the top of the wedge and decided it was time again for another pull back in the pattern. We did have a doji yesterday and that can cause some near term down side off the up trend in place. Action which allows the market to unwind from overbought on those 60-minute time frame charts. We started the selling off that doji today that took nearly 1% off the averages. Obviously, nothing from nothing, but it was a fairly good down day with the majority of stocks leading lower. That's good as it allows the leaders a breather.

The market gapped lower, filled the gap, but then spent the rest of the day gradually moving lower to close just a few points off the lows. No technical damage of any kind took place on the selling with the up trend, for now, still firmly in place. Stochastics on the 60-minute time frame charts went from nearly 100 two days ago to roughly10 today. RSI's were up at 81 and now they're roughly 52. Pretty solid unwinding for sure without a ridiculous amount of price damage, although, we can certainly see more down side in the days ahead. In the end, the bears got some much needed selling under their belts while the bulls can feel good about the unwinding that took place while still holding well above critical support.

There is important support on the S&P 500 at gap, which is at 1070. Below that we have the big line in the sand or the 50-day exponential moving average currently at 1055. The 50's are at 2092 on the Nasdaq and 9794 on the Dow. These are clearly what the bears want to target and remove from the rear view mirror. That job will NOT be easy. There are gaps above these final lines in the sand support numbers and they add a lot of protection to the bullish case. With the charts unwinding rather quickly the bears have their work cut out for them on this overbought pullback. Longer term these are truly the only numbers that matter. Remember, too, that these levels are changing daily, but only by a very small amount. I will always update those levels, especially if start getting closer to them.

Sentiment seems to sway towards being bearish here. We hear constantly how this market can't justify current levels. In the real world this may true. The stock market is not the real world. Emotion is the only real world when it comes to this nutty game. We have too many bears out there based on all reliable surveys for there to be any persistent selling pressure. Sure we can pull back 5% or so, but that's likely it, if that. A day like today brings about so much negativity it just blows me away. With the markets range bound, we may see overall downward pressure over the next week or so, and I can only imagine what that'll do the emotions running wild out there. Try to keep your emotions in check. Understand what separates a bear market from a market pulling back. It's those critical 50-day exponential moving averages.

You may all believe with every fiber of you being that they will get taken out and shot.
That may end up being true, but before you go getting all bearish and shorting your little hearts out, see the event take place and then you can respond. You won't miss much.
If the bears are right, once the 50's do go, you'll have plenty of time to make good on the short side. I would suggest losing them is more unlikely than you think for the next many months, but if you think I'm wrong, at least see the evidence before acting too aggressively on the dark side. Folks have been doing that for months and I can tell you they all regret it today.

What seems to be unfolding here is a continuation of a large wedge in place for many months off the March lows. Consolidations can take a very long time due to the move that preceded it. It was quite large in scope and thus the market is still catching its breath. The market has set a range from roughly 1101 to 1029. One could say 1105 to 1020, but you get the idea. That's nearly 8%, and 8% can really mess up ones head if you are too aggressive. In markets such as these, in order to maintain calm, you get involved with small moves. A few plays maximum at any one time is the way to go about things. This way, if you’re down a bit on them you can wait patiently for them to recover. As long as the 50-day exponential moving averages hold they most assuredly will. I stick with longs when a market is in an up trend confirmed. You can dabble from time to time with shorts, but know you're playing against the primary trend. Bottom line, slow and easy for now. In time the market will make a large move out of this wedge. It's unclear which way that'll go, but I still favor up side. Always ready to adjust if need be.

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