Jack's Wrap - Strong Late Reversal....

Wednesday May 23rd 2012
Strong Late Reversal....
by Jack Steiman www.SwingTradeOnline.com

The market was on the precipice today of getting hammered as it was trading below all its key exponential moving averages, especially the last one, or the final line in the sand, the 200-day exponential moving average. If the markets had closed below that key moving average with force, it would have been technical trouble for this stock market. There’s not much to save it, once you have lost the key level supporting the bulls. The bears would have gotten much more aggressive, and that's totally understandable, as the bulls would have walked away from the table. The bulls will create a long squeeze down no different than when the bears create a short squeeze up when the market has taken out huge resistance. The bears had the bulls where they wanted them, but the combination of oversold daily charts, with RSI's in the upper 20's and strong positive divergences on the short-term 60-minute charts, allowed the market to recover and take back key support once lost intra-day.

The bulls are wiping the sweat of their eye brows tonight. Too close, for sure. This doesn't mean the bulls are safe. Far from it. But it does suggest we may still get that back-test of the lost 20-day exponential moving averages, which is normal protocol once you have broken down. More on those levels later on in this report. Bottom line is the market was saved today after the futures cratered lower this morning, due to huge losses in the European markets. The constant flow of bad news, day after day, is causing a lot of turbulence there, and with their markets down an average of 2% overnight our markets, couldn't help but be down huge. We gapped down, and didn't look back until the last hour when the market made a mad dash higher. They’re not out of the woods, yet, but we should grind a bit higher in the days ahead before falling once again.

Mr. Bernanke is on watch again in a big way. One of the Fed Governors was out today, saying it was time to watch how the coming economic reports come in before deciding what to do next. In a way, that's a plus for the market, because it tells Wall Street that the Fed isn't overly concerned at this point about how things are moving along in our economy. The reports out recently have been quite poor, but the market takes its bigger picture cue from the words of our financial leaders. For now, the Fed seems to be signaling no panic is needed for the moment, and things relating to the economy may yet be on the improve.

I, personally, don't think they are, but my opinion doesn't matter. So for now, the market seemed to be quieted down after the Fed Governor spoke late in the day. His words certainly didn't hurt the bulls march back over intra-day lost support recaptured at the very end of the day. Maybe that speech was planned to quiet the fears of the moment. Who knows, but at least, Fed Bernanke is not in panic mode, and that's not a bad thing short-term for the bulls, with regards to, hopefully, holding those key 200-day exponential moving averages.

The market now has two levels of critical importance. Support is still the 200-day exponential moving average, with resistance the 20-day exponential moving average. Let's look at those levels so you know when the market has made a decision as to where it wants to go bigger picture. The Dow closed at 12,496. The 200-day and 20-day are at 12,475 and 12,741 respectively. Barely saved those 200's today. The S&P 500 closed at 1318. It has its 20's and 200's at 1314 and 1343 respectively. Lastly, the Nasdaq 100 closed at 2850. Its 200 is at 2824 and its 20 is at 2911. It would make the most sense to get the market up to the 20's first, before heading back down, but we'll see what Europe has in store.

Sentiment is something I always keep my eye on. The bull-bear spread is getting interesting, but not there yet. The spread is down to 11.7% more bulls than bears, which is a fairly low reading, but nowhere near a true buy signal. It wasn't too long ago we talked about the number getting too high on the complacency side. How fast things do change, folks. Once you get a negative reading, meaning more bears than bulls, you're not too far from a powerful move to the upside. This would take several more weeks of hard action to the down side, but sentiment is eroding quite rapidly here, so it won't take too much more for the final bulls hanging in there to give it up and turn bearish.

Negative action weighs heavily on everyone. It's easy to be complacent. It's tough when you're in fear, and feel as if the world is ending. It plays on your emotions every second, and eventually, you give up and turn to the dark side. When enough have done so, and the bearish trade is full, that's when things turn rapidly the other way. We're not there yet, but we’re working our way there, for sure. In the meantime, we watch S&P 500 1292, because if that breaks forcefully, the market is in very big trouble short-term, if not longer.



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