Jack's Wrap - Still Working The Base...

Monday May 7th 2012
Still Working The Base...
by Jack Steiman www.SwingTradeOnline.com

Creating, and setting up, a longer-term base to trade in takes time. When you're in the agnostic phase of a bull market, and a 5-8% correction is needed, which allows for a large handling base to set up, it takes far more time than one would hope to be true. After all, isn't it easier to just crash down, and then just blast back up? That is naturally what all the bulls would like to see happen. Unfortunately, when you've been grossly overbought for months, the process is very low and very emotionally taxing. The market won't just blast back up, and it won't just blast down, either. A nice slow grind to the bottom over several months, two months and counting still, that feels like forever in the minds of all traders. Since we're still in a bull market, it feels like things should go faster, but that's part of the problem.

The bull-bear spread is still quite neutral with readings in the low 20's, and thus, you're not just going to fall apart here. The process is a slow one, and may last several more months. In fact, it's quite likely it will, although, I think, we're on our way to getting to the bottom of the base from which the market can start to try to move higher. I think that'll be near 1325 over time, give or take, obviously. We will spend a great deal of time trading between the soon to be seen lows, and the prior top at 1422 on the S&P 500. A lot longer time can be spent there than most think is realistic. That's a nice sized range, and will be very news driven both on earnings and economic reports to come.

We can spend a great deal of time on both sides of the range. Breaking out above would require, for now, unforeseen news, while breaking down would require some consistent bad economic reports over the coming few months. If the Jobs Report continues to get worse, and/or the ISM Manufacturing Report starts to erode, the market is in big trouble. But that's where Mr. Bernanke comes into rescue things. He'll be sure to promise help, and if need be, implement QE3. He won't likely allow things to erode in the election year, so the range bound market is likely to be with us for quite a while longer. You should be getting somewhat used to it by now.

Stocks, such as Apple Inc. (AAPL), have probably entered their own phase of the agnostic market. It printed a nasty black candle on its earnings report a few weeks back, and has been struggling to move higher ever since. The path of least resistance has been lower, and this is the leader of all leaders in the stock market. Many stocks, with great earnings reports, have moved higher initially only to see things stall out while heading lower somewhat. It's not bearish action for those stocks. Not at all. It's just they, too, will be slowing down as the market remains in this boring, mostly lateral phase, of things. Apple is lowering its 50-day exponential moving average or hovering right on more consistently now. That’s a change of character.

Stocks are also getting hit much harder when they do report their earnings. Stocks, like Cognizant Technology Solutions Corporation (CTSH) for example, is a real leader that was torn apart today. Less mercy in this market environment than if we were in the raging upward phase of this bull market. This is the time when you take less risks, especially into earnings reports. It’s also a time when you have to be certain about how much you really want to be playing at all. Lots of cash is not a bad way to be playing for now. You don't have to, but there's nothing wrong with it, if you are more relaxed when things are like they are now. Agnostic is tough for everyone in this game. Until a clear bottom has been established, again, I'm thinking near 1325 on the S&P 500, it's very difficult to play. Apple is telling us all how tough things will be for some time to come.

France had elections over the weekend, and Sarkozy was voted out. The futures initially crumbled under the news of a new regime taking over. The market was worried about how the incoming party would deal with the recessionary crisis at hand for most of the Euro-zone. The initial reaction is to always sell when the market has doubts about anything politically important. Cooler heads prevailed after the Dow futures were down nearly two hundred points, when factoring in the complicated formula of fair value. We only opened down about fifty points today, and did so at oversold, thus, the reason for some recovery as the day went along.

Oversold will go away, and thus, allow for yet another attempt lower. That should be met with some positive divergences on the short-term charts. Once that plays out, we could see our final strong move down to set the near-term bottom, but let's take this one day at a time. 1357 is key, and if that goes, we see 1340 down to 1325. 1312 is always possible as that's where the 200-day exponential moving average lives. This general area of support should be the lows in this move, but we'll watch as things unfold over time.

One day at a time, for now, as the market tries to find a bottom in the days, and especially the weeks, to come.



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