Our Negative Divergences Kick In Hard...

Jack Steiman from SwingTradeOnline.com at 11/02/09

I've been talking quite a bit lately about the very nasty negative divergences across the major indexes on the daily charts. In many cases, quadruple negative divergences. That's not something you see very often. When it takes place, at some point in time there will be a price to pay for that type of set up. We are seeing that take place now. The sad thing is, if you're a bull, these set ups often end a bull market. Once the wedges go, there's no looking back.

The wedges are not only broken on the major index charts, but also on many key sector charts such as the banks, transports, etc. Conversely, we now have a wedge breakout on the PowerShares DB US Dollar Index Bullish (UUP), which makes the situation that much more dire for this recent bull market. With the market trading inversely to the dollar, a stronger dollar does not bode well at all for the bulls. What was unknown was when the divergences would finally kick in. One negative divergence after another and up we went. It was a fun ride and staying with that trend was the only way to play. We enjoyed seven fun months of trading. We never went against the trend. It paid off nicely. You simply wait for the bearish rising wedge to break and that's when you know the overall up move has ended. It's called a bearish rising wedge even as we go higher due to the negative divergences that form as we rise higher and higher. The market has made the turn. We are in a bull market no longer. Things can change again in time but for now the bullish trend is a memory.

Now that the bullish trend is over, where do we go now?

Well, to begin with, we are extremely oversold again with the Nasdaq also at important horizontal support at 2040. The S&P 500 not far behind where it has massive horizontal support at 1020. We should have some type of up move, although don't expect much, to unwind the oversold oscillators across all time frames. The market is far more likely to stay at or near oversold now, so don't expect a move higher on the daily charts that gets us overbought. When a market is confirmed bullish, we stay at or near overbought for very long periods of time, especially on those daily charts. Now that we're transitioning to more of a bear market, we can expect markets to stay at, or near, oversold for longer spells of time. This means that shorting rallies makes the most sense and avoiding getting involved with one to two day up swings. If we lose 2040 on the Nasdaq, we can expect to see next support at around 1960, another 4% lower. Please keep in mind that just because the trend has changed, this doesn't mean the market just crashes out and falls apart. Probably not going to be the case. It's a long and arduous process. Step by step along the way. I'll guide you through it.

There are so many red flags out there it's hard to know where to go to next. I've explained the divergences and wedge breakdowns, but we also have massive breakouts in the VIX and VXN (Volatility Indexes) which is a huge negative for equities. They're just breaking out (VXN chart tonight) and this means the market can take quite the hit from here over time. All of this goes back to trying to be less emotional about the market. The bull has been fun but you need to adapt your thinking to what's here in the present. If you are more of a permanent bull thinker, you need to be open to what's possible here. With the VXN breaking out from compressed levels, that's not the time to be a stubborn bull. Adapt please. There are very few bullish signs out there. GDP (The Gross Domestic Product) was nonsense. All stimulus, that won't last and the market knows it. Let the market tell you the facts. The action speaks for itself.

(See also today’s other Index Charts below: SPY Daily, WLSH, SPX Weekly, DJUSST, RUT)

What made today extremely bearish was the engulfing stick that took place right below the 20-day exponential moving average on the S&P 500 at 1068. We closed a couple of points below it yesterday and then fell like a stone today, completely engulfing yesterday's up day. Remember, please, that we're talking about engulfing a 200 point up move as well, not some small stick. Very bearish action for sure. With the failure at that 20-day exponential moving average and with the S&P 500 and Nasdaq closing below the 50-day exponential moving averages again today, this is nothing but bearish. As I like to say, you can't play bullish spin doctor with today's action.

So here we are. We saw a big sell off this week with one major head fake back up that sucked in a lot of dollars that got annihilated today. The trend is changing. It's not cause for celebration, but it also doesn't have to mean you're going to lose a lot of money. There's nothing wrong with cash. There's nothing wrong with playing shorts from time to time. Just don't go out and get bullish because you want things to be fun again on the long side. Be appropriate. Adjust and you'll be just fine. Don't ever be afraid of the market regardless of whether you enjoy being a bull or a bear. If you have an open mind at all times, you can do well enough to get you through the rough times.

The market is still showing nothing at either extreme when it comes to sentiment. Advisors and investors are showing that although we have more on one side of the ledger, it's nowhere close to extremes that change markets. Sentiment is not the reason we're turning here. The options world is neutral. No extremes of fear or greed.

Strong moves lower in most Sectors this week mirroring the Indices, many breaking to the downside through major Support Lines and 50 EMA Supports. The Financials led the move to the downside last week and this week the Transports, Semiconductor, Technology and many Commodity areas followed. Many Weekly charts mirror the Steel ETF chart (seen in, DJUSST, our 5th chart below) which broke down out of a Bearish Rising Wedge Pattern with targets back near the lows. Oil held up relatively well but gave up a lot of its recent gains late week on the breakout of the US Dollar out of a Falling Wedge Pattern. Gold also held up relatively well on balance. Most foreign markets tended to follow ours with Europe under pressure with Asia likely to follow our lead to some degree.

The week ahead will be interesting as always. We should see some attempts to bounce from extreme levels of short-term charts at oversold but the bounces shouldn't be sustainable. If we lose 2040 Nasdaq we can see down to1980. Would be weird to see 1900s again. If we ever lost 1020 S&P 500, the next journey would be quite a ways lower. Let's be smart this week and use rallies to either short or lighten any longs you may already be in.

Very slow here is the way.