Bases Setting Up Below Key 1121 S&P 500 Pivot....

Jack Steiman from SwingTradeOnline.com at 12/14/09

The more I watch this market through its every day whipsaw, the more I am convinced that the next decent move is going to be a higher one. Please study the charts tonight that are being provided for you and notice how so many of the index charts are forming bases, longer-term ones as well, right beneath major breakout levels. 1120 is the price breakout on the S&P 500, but 1121 is the official 50% retrace level of the entire move from the Bull market high of 1576 to the March lows at 666. Many look at that type of retrace and say this is where bull phases go to die within a bigger picture bear market. I think we're going to take that level out in time but it hasn't and won't come easy. When you have so many bases spread throughout so many different sectors, you have to give the benefit of the doubt to the bullish case. If we were just seeing one or two here and there I'd be much more of a doubting Thomas here, but the fact, that I'm seeing these bases set up all over, you have to recognize the potential significance of such a set up.

A trend is a trend until it isn't and truer words were ever told. The trend has been higher for quite some time and all weakness is getting bought up at the 50-day exponential moving averages if you study our bases closely indicative that the final sellers are being shaken out. Sometimes well above that. It's not only happening on the index charts but on many individual leading charts. Beyond that, we're seeing it take place on the secondary stocks as well. Some aren't working but the overall trend is. Bottom line is you have to give the bulls their due. It seems to me, based purely on those base set up patterns, that this market, in time, not necessarily next week, will break out.

See charts at SwingTradeOnline: WLSH (Wilshire 5000 Composite Index - full cap), MID (S&P 400 Mid Cap Index), RUT (Russell 2000 Small Cap Index), INDX (Nasdaq 100 Index), USD (US Dollar Index), WTIC (Oil - Light Crude - Continuous Contract Index).

Let's go over the buying that's taking place to save this market from breaking down. Let's drift back a bit in time when we were lucky enough to catch the bottom of the bear market, or at least that leg of it. We were only long throughout and then over time, the rally started to fade out. After a tremendous move higher the market started to move laterally. Lateral moves off a strong move higher get people very bearish almost instantaneously given the back and forth action which ultimately serves to ratchet up bearish sentiment and provide the short fuel for the next leg higher. They look at the action and figure the upside has ceased and thus the best must be over with. Lateral moves make bears out of many previous bulls and make normal bears become super bears. Once buying ends it must be the end of the good times.

However, to try and understand what's really going on you have to sometimes dig deeper and see that the bulls are constantly defending important support areas with relative ease.
They are not just buying the ETF's but also heavily buying individual stocks at those key support levels such as trend line or 50-day support. The buying that's taking place is akin to a healthy market, not one ready to fall and roll over.

There are always exceptions to this rule but it doesn't happen that way all that often. A market that has made a strong move higher is bound to consolidate that move and it usually lasts a lot longer than anyone wants to believe it can or even should. That's what brings in the pessimism and also keeps it moving higher. The buying that has strategically taken place in this three-month consolidation is what should take place if things are truly more bullish. The necessary energy needed to punch through resistance is being built up in our Lateral bases which will need a trigger. A gap up/out would serve to trap a lot of short interest.

There are definitely better places to be these days within the overall market. Some sectors are in their more positive phase while others are more in to their retrace stages. The ones not acting as well were behaving better previously thus it's not so bad when you look at it from that perspective. Money rotating around to keep the bull market going. As one sector gets overbought, usually severely so, then it needs its time to unwind the oscillators. When the other sectors get oversold, sometimes severely so, they start to rise off the bottom. A nice game of musical chairs that keeps everyone guessing.

Long-term support, critical support, comes in at those 50-day exponential moving averages. Unless we lose those levels we are still in the bull phase of this market. Those levels being 1080 on the S&P 500, 2138 on the Nasdaq and 10,121 on the Dow. Over 1121 on the S&P 500 is the true longer term breakout number to be focused on. If that goes with power, then we focus on 1150/1170. It won't come easy as I have already talked about but again, if and when we clear that 1121 level, things can move higher with more force. For now, we deal with a lateral consolidating market. We accept it for what it is and hang in with plays unless we lose those key 50's.

Although some of the surveys we follow show more bulls than bears by a decent amount, the action in the options market shows anything but too much complacency. Most days we see readings closer to 1.00 than to 0.60. 0.60 shows too much complacency while anything at or above 1.00 shows too much pessimism. We're usually closer to the 1.0 level thus sentiment is not an important issue at this moment in time.

Strength in the US Dollar, PowerShares DB US Dollar Index Bullish (UUP) over the past week has sent many of the Commodities into correction mode. Gold/Silver, SPDR Gold Shares (GLD) / iShares Silver Trust (SLV) and Oil, iPath S&P GSCI Crude Oil Total Return Index (OIL) stand out as areas that continue to correct to the downside. The Financials continue to be mixed. Retail remains in a strong uptrend along with the Aerospace Group.
The Utility Sector continues on breakout. The Airlines/Transports continue to be strong.
The Semiconductor area looks likely to take a breather near-term after a strong move.
Large Cap stocks continue to see nice rotational flow off respective 50-EMA Tests indicative of institutional support.

This week will see the usual number of economic reports that the markets pay attention to and, of course, we will continue to watch how the lateral consolidation proceeds. There could be the usual number of good and bad days just to throw everyone off emotionally.
That's the job of the big players. We take this market a day at a time but it's important to hang in with the best set ups and let them work over time. Any pullback above the 50's is just noise in the pattern.