Wednesday April 11th 2012
Pause For Now But We'll Go Lower....
by Jack Steiman www.SwingTradeOnline.com
Today we got a break in the action to the down side as the market went up for most of the day near, or above, triple digits on the Dow. We got extremely oversold on the short-term 60-minute charts, and were due for a bounce. RSI's got into the 20's, thus, today's bounce was nothing to be surprised about. The real question is was today's move up the start of something bigger for the short-term. I think the answer is clearly no. In fact, in the short-term, we should see prices fall further still. Maybe another 2-3% to create a bottom that's playable to the long side. A bottom that should basically set the low end of a new range that we will likely trade in for quite some time to come. The top is 1422, although that level will be very difficult to get through in the weeks to come as there are now multiple levels of very tough resistance above current price. Lots of gaps, not to mention the 50-day exponential moving average, and the old breakout level at 1370. Above 1370 are multiple gap downs so getting back to 1422 would require an extremely high number of great economic reports. Not likely to happen on a level that would bring us that high. Once the market finds its low level here in the days to come, we will most likely trade in a range of roughly 5-7% for some time, possibly months. Lots of whipsaw in that new range.
There will be times you'll think the bull is ready to rage higher, and there will be times when you think the bull market has most definitely ended. Neither is likely to become a reality. Keep in mind that wide whipsaw ranges are used to unwind sentiment as folks get more disgusted with the market action. They think the end has come for the bulls and simply give up thinking we can ever go higher again. The market needs a long period of believing things are over for the bulls. The process is under way as things are already calming down on the sentiment front as we saw a drop of nearly 5% from week to week on the bull-bear spread that comes out every Wednesday. Three to six more weeks of overall poor market action will get the market plenty bearish with regards to sentiment. So today we saw a break from the selling, but soon enough the selling should come back, allowing for a trading range bottom to be found.
I think what will be most difficult for market participants will be how long this range, once fully established, will last. We're basically two full weeks off the top of the S&P 500 1422 print. We're now playing with the key 1370 level, which makes 1422 seem like a distant dream for the bulls. If we get to 1340, the 1422 level will seemingly become impossible to get back to. Time and patience is not something market players are good at. They want immediate gratification. But they are unlikely to find it, although, once we get a nice positive divergence on those 60-minute charts, there should be some very good opportunities on the long side. You will have to pick your spots to play very carefully. Playing less frequently, but waiting on just the right moment, is the only way for some success in the coming months. That will occur when 60-minute charts set up with positive divergences, while the daily charts are nearing great support with highly unwound oscillators, initially the stochastic’s getting oversold as they are getting now. Just playing any old time won't work as the bull market is now in a longer-term pause phase.
Shorting will be equally as difficult as going long, and should be played the same way as the longs will be playing. On moves higher, you simply wait for negative divergences to form on the 60-minute charts at daily chart resistance. These opportunities don't come very often, so you have to hit it when it presents itself, and remember to get out quickly as things will swing back and forth rapidly. Play the divergences quickly and get out of town. Take what the market gives is all I can tell you over the next several months, and playing the 60-minute divergences will probably offer up the most opportunities.
The market is all about adjusting. While I believe the market has some legs left in this bull market later on this year, you have to adjust should something present itself over time. If the charts turn more bearish due to the fact that economic reports sour out over the coming months, you have to adapt to the possibility that the bull is over. You don't play it from here as if that will happen, because the charts are simply not indicating that at all. However, you need to stay open at all times, due to the fact that things can, and often do, change quickly, and with little to no notice. If the charts start to match up with eroding economic reports, or eroding conditions overseas, I'll make note of it and change how I play.
For now, though, I believe there is more left in this bull later this year, with a very boring and difficult period in between. Stay nimble, please, as the more you play this type of market, the more likely it is you'll have bad experiences. 1340 is strong support, with 1422 now massive resistance. Let's see if the market can find a bottom near 1340 in the days and weeks ahead.