A Start...

Jack Steiman from SwingTradeOnline.com at 01/21/10

Today we saw the Dow down as much as 210 points before it rallied off of some oversold 60-minute charts. It finished down 122 points which is still somewhat satisfactory for the bears. They can at least feel as if they did a little damage, although, there has to be some frustration over the fact that they couldn't even close the major indexes below the 20-day exponential moving average. Only when that is accomplished will they get the chance to take this market down to the 50-day exponential moving averages across the major index charts.

Now there is no question that those who have missed much of this rally off the lows last March are looking to enter this market whenever we get some selling so the rally back off the 20-day exponential moving averages today is no surprise to this writer. However, if the bears stick with it, there is a respectable shot at getting this market down towards those 50-day exponential moving averages in the short-term. Why? Because many of the bulls are already in with the sentiment readings being what they are. A 33.5% spread.

A bit high thus there is still a decent shot that the bears could get this market down to those 50's but it won't be the easiest of things to get done. Bottom line is that the bears got the ball rolling a bit today but still need to take out those 20-day exponential moving averages currently at 2282 Nasdaq, 1132 S&P 500 and 10,575 Dow. If and when they get this done, we can the 50's get tested.

When markets get overbought we have to get through a period of time where things need to unwind. The oscillators (RSI, stochastics and MACD) get to the point where the band just snaps and we need to pull lower. However, it is essential that you differentiate between some selling and a bear market taking hold once again. I'll explain soon in this letter why I think we are nowhere near a bear here. I can tell you through experience that once selling ensues, you can take it to the bank that everyone who has been bearish will come out of their hiding places and tell us why the story is over. That, my friends, is how you bring sentiment back to a place where markets can climb again. I will remind you all yet again, fear is a far greater emotion on an individual than greed. Once you get some selling and the average trader starts to hear how things will fall to pieces yet again, it won't take long to shift things to the bearish side of sentiment. Then we go higher yet again and leave the masses waiting for more selling. Wash, rinse and repeat.

So now that we have some selling under our belts, let's look at how things are doing on the daily charts in terms of unwinding those nasty overbought oscillators. Starting with the Dow we can see that at the top we had stochastic readings at 100 with the RSI at 65. Those numbers are now 73/54. Some decent unwinding has begun. On the S&P 500 we saw a top at 100/68.
Now the readings are 74/55. Finally on the Nasdaq we had 100/70. Now they're at 54/54. Not bad for the bulls at all. Readings lower than what we have now is needed and would be best for the market. Let's see how things unfold. We're about 40-50% of the way towards being unwound.

Now let's discuss the single most important factor that moves the market. Earnings! This is so interesting. You're hearing nonsense on some of these shows such as what you see on CNBC about how earnings are being sold. Great earnings are being sold. Are they? NO!!! Nice fantasy but no reality.

Let's talk about it.

Some are great are being rewarded immediately. Cree (CREE), eBay (EBAY), Seagate Technology (STX), to name just a few. Others are solid but being sold off some. So what!! Some are full and need to unwind thus it doesn't matter if they're good. They're being sold short-term. Intel (INTC) was sold. The market fell since and now it's back to flat from when those earnings came out. Many are like INTC. They go down 1-2% initially and then are coming right back up because they are solid and offer buying opportunities on any selling that takes place. If earnings are strong there is no chance of a market that will fall apart. Correct sentiment? Yes! Correct overbought? Yes! Crash out? No! Earnings thus far have been stellar versus expectations. There will always be bad reports. However, overall it has been solid. That my friends I believe will prevent anything terrible for this market.

Look folks. Maybe I'll get this wrong. If I do, you'll let me know it. I'll deserve that and probably shouldn't put myself out there the way I do. I open myself up for massive criticism if I'm wrong and I definitely don't make enough to put myself out there the way I do, but heck, why not. The sun will still rise. I do NOT think the market is done trying higher prices. I do NOT think we are back in a bear market. I do think this market has a good chance to test the 50-day exponential moving averages and that won't feel good, but we'll see about that. Day at a time. I think a great opportunity will present itself soon. You can follow or you can not. Do what feels right to you. These are just my feelings based on what I'm seeing. It'll be fun watching it all play out.