Stock Market Lateral Consolidation Continues

By: Jack_Steiman

No one and I mean no one can deny that this market has done a great job of frustrating both bulls and bears alike. Bad news gets absorbed by the market without any real down side action. How annoying was Thursday for bears! Horrific numbers on the retail sales front. The market falls some only to recover late and show gains. With gains in retail sales expected and with losses the actual outcome, it's hard to imagine being short this report and having to cover or even if you didn't, you had to deal with an up market in a down report. No fun.

If you're a bull, a good cpi (consumer prices) report today was ignored and down we went. Just when it seemed we'd finally break out and take out 2015 Nasdaq, or that multi year down trend line, we head south in a big way for most of today, although a nice recovery late. More on that later. So good news drives the market down and bad news allows for upside action. That's what happens folks when a market is trading between two key pivot points but isn't ready or break down or break out. I'll discuss why the market hasn't made the move in a moment. The two pivot points being the 20 day exponential moving averages underneath current price and the 2015 multi year trend line above current price.

The market has continued to go up in the face of very overbought daily charts. The shorter term charts, particularly the 60 minute chart, whenever it gets oversold after a drop of selling, the market continues back up, even though the daily charts never really unwind very much. Those daily charts have stayed overbought a lot longer than anyone would ever expect. With that being the case, and even with good news today, the market said no go for a breakout as it chose the route of least resistance, some very much needed selling to unwind those oscillators that are just begging for some vacation time. To me, that's outstanding news. Markets can't make a true breakout if the oscillators never pull back. Breaking out at very overbought is not what any real bull wants to see take place. Bottom line is that no damage was done today, but some much needed oscillator unwinding has finally begun.

 
So what can be expected of this market from here? I can tell you that the moment a selling episode begins, the bears come flying out to tell the world the market is toast. It's done. The death knell has begun and if you're a bull, you better start your mass exodus out of stocks or you'll be very upset you didn't come a few weeks to months from now as we break down and test back to the old lows in no time at all. The question I have for the bears is, why does some selling to unwind very overbought conditions necessarily warrant the thinking of it's all over for the bulls? Of course anything can happen, but if you study what took place today, you can get a hint of what may be unfolding here.

We see that the rsi's, once above 70, are now trying for the upper 50's. Stochastic's, once near 100, or the maximum number, are now basically in the mid 70's. In other words, the oscillators are no longer very overbought but it would be best, now that they've finally begun to fall, to fall back further. There have been some crosses bearish on those oscillators suggesting more down side to come, although you can expect up days un between. Unlikely to be straight down as the 60's will be oversold soon and that should provide a bounce as the process moves along. the beauty of it all is this, we are unwinding without a lot of price erosion.

No one would say that today was a blood bath by any means. In addition, the critical 20 day and 50 day exponential moving averages are now racing up to meet those critical areas of support such as the 956 neck line on the S&P 500 which flashed the initial buy signal in the market. As long as the market holds above 956, and I say it will, as the oscillators unwind, this market should have yet another leg up over time. Patience will be needed for now as we likely fall further overall in the days ahead. With the market clearly on a buy signal as long as we're trading over 956 on the SPX, and with the 50 day exponential moving average now having caught up that price level, I truly believe there is more upside to come down the road and we will not break down as we correct here.
 
Sentiment Analysis:

Put/call readings have begun to show more readings on the lower end of the scale which shows a definite increase in the number of folks getting more bullish. Some complacency is definitely coming in. In addition, the AAII survey shows a 28% spread now of more bulls to bears. Not a number that has ended bull markets, 40% usually does that, but it's getting up there and could use some cooling off. It won't take a whole lot of selling to accomplish that feat. Folks sour to the market the moment we have one single day of selling as evidenced by the number of emails to that fact I saw today.

The why aren't we selling longs posts and why aren't we going short posts. Fear and darkness are the easiest emotions for the stock market. That's from a lack of belief in the market action based on fundamental analysis and also due to fear from the past two bear markets from this decade. Two extremely nasty bears that have folks seeking shelter the moment we have a bad down day. And today wasn't even bad. Imagine if we have a 200 point down Dow day! A little complacency has hit the market but I get the feeling that we began to heal that cut from today's action alone.
 
Sector Watch:

Choppy action this week in the majority of our sectors which somewhat mirrors our index charts.  After a strong advance most indices and sectors are now in consolidation which thus far appears normal and healthy as some profit taking takes place.  We included a weekly snapshot of the oil contract (see our 5th chart below) which remains more or less in a base between the $60 area bottom and the $72 area topside.  The Shanghai Index, which has a major impact on the commodity area, topped out two weeks back and looks headed for a test of major support in the 2700-2850 area on this pullback move. 

We expect the commodity area which was choppy this week to turn higher after both the Shanghai and our market has finished with our current 2-3 week consolidation move.  Copper and coal were both strong this week, but took a breather late with the market.  The Semi's/SOXX/Semiconductor HLDRs (SMH) pulled back some this week but we are looking for strong support to show up in the 275-280 area not too far from current levels.  The financials/Financial Select Sector SPDR (XLF) continued to maintain their advance and are showing some leadership qualities.  Most biotech/healthcare areas pulled in some this week.

The Week Ahead:

The upcoming week should be very interesting.  I would expect further attempts to sell, but I would expect the market oscillators to unwind very quickly once that hits. There will be up days that may fool people in to buying too heavily too soon. Only a move cleanly over 2015 should make you do that. Back and forth would be my thinking with more of a down trending market to get things cleanly unwound. Timing this is next to impossible. You simply follow the bouncing technical's and they'll let us know. Most of the earnings season is over. Don't expect much from that front. The market is basically on its own and I think that remains a bullish scenario, short term selling or not. Remember please that until this market loses 956 on the SPX on a closing basis with some force, this market remains on a clear cut buy signal. Don't get fooled or overwhelmed by some additional selling that may "feel" bad. Keep your focus on the bigger picture.

Peace

Jack

Have a Great Weekend!

Peace
Jack Steiman

Jack Steiman is author of SwingTradeOnline.com ( www.swingtradeonline.com ). Former columnist for TheStreet.com, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

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