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Where We Are...

Jack Steiman from SwingTradeOnline.com at 02/18/10


As for me, who knows but for the market, let's explore the message(s) being sent. When one studies the market, the focus should really be on two things. Secondly, sentiment. It's not an exact timing mechanism but all it needs is a catalyst and she'll kick in hard. The one thing that holds true more than anything in this game is earnings. As goes earnings so ultimately will go the market. For those who want to be cynical because they feel earnings are being made to look better than they really are due to stimulus, that's your choice. However, when earnings are good and forecasts are good or even better than the current quarter, it's going to be very hard for a market to fall appreciably lower. Always pullback's like we saw when the bull bear spread reached too complacent 37.5% more bulls.

However, bigger picture, you can't kill a market when earnings are solid. If you add in enough pessimism as we have now with only a 7.9% spread, bear markets are virtually impossible. Of course there's always the worst possible news we'd rather not even think about which could bring about a bear no matter what else is going on but aside from the unthinkable, the market just can't see anything resembling a bear as long as earnings are solid and sentiment is more on the too pessimistic side of things.

These are the conditions we have now. Just in the past few days we're seeing leader after leader produce solid numbers. NetApp (NTAP), Analog Devices (ADI), Hewlett-Packard (HPQ) and Applied Materials (AMAT) along with priceline.com (PCLN) tonight. Some better than others but no warnings. Nothing terrible. All up some. There are blowups but mostly things are solid. Whole Foods Market (WFMI) yesterday along with Deere (DE) this morning. I could make a list that the bulls would be very proud of. Bottom line is this market will not implode. Struggle from time to time for sure but nothing horrific. Earnings and sentiment will just not allow.

We are trading in quite the range these days that seems endless. The S&P 500 touched 1044 a week or so back. This was two points at the time below the 200-day exponential moving average. The Nasdaq and Dow never got to their 200-day exponential moving averages. The S&P 500 has established the bottom of the trading range and we know now that the 200's are solid support. We also know that the recent high at 1151 S&P 500 is strong resistance. It's fighting here just to get back above its 50-day at 1097.

We're still a long way from getting back to the old highs. A large range of 10% has made itself quite clear. All one can do in such a range is play mostly off the daily oscillators while using the 60-minute charts for the best entry points. The daily charts will tell you when to exit. This type of wide and loose trading range also brings about a lot of whipsaw which tells you why it's so important to look for entry on those 60-minute charts for proper entry meaning buying when that chart is not overbought. A good entry equals less stress and less whipsaw thus likely a better exit over time. We have no choice but to play this way as long as we're trading within such a wide and loose range of 10%.

TRUST!! Because we know folks are fearful once selling kicks in the way it just happened, it's clear that sentiment won't be jumping up any time soon. Trust just isn't there. I talk to a very diverse group of traders and investors every day and I can feel the pulse of anxiety out there. Fast heartbeats. Too many bear market over the past decade for folks to really get too complacent right now. They started getting there but this past correction slapped them down. I am still reading around and find that the masses who print letters or those in chat rooms truly believe the end of the world is around the corner. It's good to keep the ear close to the crowd to get a feel of what's really on the mind of traders. I know the market could get killed at any time but too many folks are bearish here and thus it would take significantly higher prices before folks get too bullish again. No trust.

Again, short-term charts, 60-minute charts, are overbought. Daily charts are not. It's hard to know just how far we'll pull back from here but I wouldn't expect anything more then roughly 1% from current prices. Will we clear 1151 any time soon? I doubt it but that doesn't mean there isn't room here because there is. Also, many individual stocks have made their initial move off the bottom and may need time to consolidate some but should head back higher sooner than later.

In addition, because last months candle stick was an engulfing stick of the previous months stick, it is important for the bulls to have an up month against this set up to negate it somewhat. Nothing is clear 100% except what I believe is now a more favorable environment for stocks, especially on pullbacks. No one should be putting out a long term portfolio here but at the same time, buying stocks is the way to go here. I don't think shorting is the way to go here. The market should continue to trend higher overall from here for at least a while longer.

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