Saturday May 14th 2011
Headaches, Headaches, and More Headaches.....
by Jack Steiman www.SwingTradeOnline.com
The market had a tough close to the week. The number of headaches for this market is starting to add up. The market spent the week testing key support and finding a way to hold above it. 1335 S&P 500 is horizontal support that the bears worked on over and over all week, but somehow they couldn't take it out with any force. Although they did take it below by a few points intraday on one occasion. The problem for the bulls is that they couldn't muster up enough energy each time it held 1335 S&P 500 to blast it higher. 1370 never came close to being tested back on the up side.
As the week wore on the market seemed to gravitate more towards the lower end of the current range. We had a gap down recovery on Thursday that looked oh so good for the bulls coming into the action on Friday morning. The futures were up strongly early on, but started to erode as the morning wore on allowing only a small move up at the opening. It didn't last as things started to slip from green to red as the day moved along. At one point the Dow was down nearly 150 points. A late recovery which held 1335 was how it finished up, although we closed only a couple of points above leaving the door open to moving below that key level early next week. It won't be easy to lose it, but the door is now open a bit more. In the end, the week did little to settle the score about which way it wants to move for the short-term as it's still trading between 1370 S&P 500 and 1335 S&P 500.
So let’s talk about headaches. They are adding up here. Probably the most bothersome for the bulls would have to be those extremely nasty weekly index charts across the board from the S&P 500 and Dow to the Nasdaq, WLSH, LJH, LWM, NYA and more. No matter where you look the negative divergences abound. They are strong negative divergences and they are occurring with oscillators very top heavy, which is what truly makes them so ominous. Elevated oscillators with negative divergences on the MACD, RSI, and Stochastics make for a scary outlook.
Now, with the daily charts in better shape it's not instant gratification for the bears, but the reality is that those negative divergences are going to play out and the best the bulls can ultimately hope for is lateral movement to work them off. But normally it gets worked off with some pretty decent moves lower over several weeks to months. There isn't an important index healthy on those weekly charts, so yes, we can try higher one more time, but sooner or later those weekly charts will have to take over, which means some extreme caution should be part of your daily routine.
Now that I’ve discussed the number one problem facing this market technically, let me give you a rundown of the other problems sitting out for the bulls short-term. There’s everything from major leaders breaking down, to the proximity of 2007 highs, to sentiment, to the end coming up for QE2, to rising gas prices, to copper breaking down and diverging away from the S&P 500. When copper breaks down it's often telling us the economy is not in really good shape. But let’s go back to the leaders breaking down. We saw a multitude of big names break below their 50-day exponential moving averages on their daily charts. I'll name just a few although there are scores of them everywhere you turn. Super stocks such as Apple Inc. (AAPL), Baidu, Inc. (BIDU), Sina Corp. (SINA), and Sohu.com Inc. (SOHU) are at the top of the list, but the list is much deeper than that. This is a total change of character for this market. Of course the very worst of stocks can be found in the land of the financials with stocks breaking down everywhere you turn including the ETF Direxion Daily Financial Bull 3X Shares (FAS). The Goldman Sachs Group, Inc. (GS) can't find a bid. In fact, it’s one of the worst performing stocks in the world right now. An RSI of 22 on the daily chart for days as it continues to go lower. No bid at all from severely oversold. Just awful.
Stay away from that part of the market if you need to go long. Broker dealers and banks are just horrible right now. Sentiment is Still high, although improving, but once you get a support high reading such as we did at 41.6%, more bulls to bears, it takes quite some time to work off. The market is also starting to anticipate what’s next for the market once QE2 ends in six weeks. Where's the liquidity going to come from is what it wants to know. Add in the economic strain of inflation everywhere, especially at the pump, and the market has real headaches to deal with short-term. It doesn't mean we head down right now, believe it or not, although we could. Remember that we're in a primary bull market, but there are mounting headaches, thus, the red flag is up.
The S&P 500 has massive support between 1335 and 1315. Let’s discuss the importance of each one and why it'll be very hard for the bears, even with all the headaches out there, to take this market below 1315. 1335 is strong horizontal support. 1327 is the 50-day exponential moving average only eight points below. After that, we only have to look nine points downward where we have strong gap support, and then just three points below that we have the long-term uptrend line at 1315. So we have strong horizontal support, the 50-day exponential moving average, gap and trend line support all within 1.5% of each other. Four strong, powerful areas of support. Below 1315 we have free fall land. Nothing much until we see 1250. This is yet another reason why it'll be so tough. In a primary bull market it's hard to get to the land of free fall for the bears as the bulls will fight with all they have, and they have plenty folks.
This is why shorting isn't going to be easy either. For now, the bears haven't even been able to capture level one of this application. You have to laugh. It's like an I-Phone app. Get through level one and work on level two all the way through level four. If the bears could take out level one they have something to talk about, but for now, they've accomplished absolutely nothing. So yes, the headaches abound, but until the bears get rolling, the market remains almost unplayable for the very short-term. Please play cautiously.