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Nasdaq and S&P 500 Stock Markets Breakout Over Two Year Downtrend Lines

Stock-Markets / Stock Index Trading Sep 12, 2009 - 06:43 AM GMT

By: Jack_Steiman

Stock-Markets

Best Financial Markets Analysis ArticleThe charts for the past month, if not more, have been suggesting, in normal times, that this market was about to take a big hit to the down side. After all, there have been existing massive negative divergences on many of the dailies on both the index charts and many individual stock charts, especially the leading stocks such as Apple Inc. (AAPL), Google Inc. (GOOG), and more. It's even more pronounced on recent leaders such as the financial stocks, especially the Financial Select Sector SPDR (XLF), or the Emerging Markets Telecommunications Fund Inc. (ETF) for that group of stocks. Just awful looking charts abound about everywhere.


So what has all of this meant?

Amazingly, it has meant higher prices. We haven't exactly been blasting up. In reality, we've been mostly just meandering around with a slight lean towards higher prices. A grind would be the best way to express it. However, during the week, we broke above the two year down trend line on the PowerShares QQQ (QQQQ)'s, Nasdaq Comp NDX Fund ECA (NDX) and Nasdaq 100.

That is big news as most didn't think we'd ever make that move as the rally lingered on. Surely this would be the place where things died out but that just wasn't the case. The market continues to baffle the experts, many who have been bearish and short for quite some time. On many levels you can't blame them.

So what keeps this market moving higher when the oscillators say it shouldn't?

To start with, we have to go back to the massive trend line breakout over S&P 500 956. Once through, the bulls weren't letting go. The bears began to feel the squeeze above this level and this pressure hasn't stopped. Many who missed the rally now want to be part of it and this too keeps things moving upward. On any weakness, new money comes in with the hope that new highs are in the market's future. In summation, it's the emotional aspect of this game that keeps things moving along and it's showing no inclination to stop any time soon, although there will always be pullback's along the way. Of course, in time, it will end. My guess is we have another month or so thus I wouldn't be buying a long-term portfolio but I would continue to buy weakness, picking up stocks with solid bases along the way. The buy signal remains in place.

We were incredibly overbought heading in to today's action. The futures hovered around the flat line thus we opened flat. We moved up and down in a very tight range before the market finally headed south a bit. The Dow Jones Industrial Average (Dow) was down about fifty points at the lows but recovered about half those losses at the close. The S&P 500 and Nasdaq 100 barely lower as well. Some small unwinding took place but we could surely use more to unwind things back on those 60-minute time frame charts to where new entries would be most safe.

Hard to say how much selling we get although we hit some Trendline Resistance on both our Nasdaq 100 and S&P 500 Daily charts (charts 2/4 can be viewed at http://www.swingtradeonline.com). A move down to the 1015-1025 would be best for some unwinding. I do think we will move back higher in time but the market should run in to real headaches at S&P 500 1060 where a large longer term gap on high volume is in place (chart 3 can be viewed at http://www.swingtradeonline.com). If and when we get there, you can only imagine how overbought we'll be. That, in combination with the gap, should knock the market down for a while. It doesn't mean the ultimate top will be in but 1060 will be very tough folks so if we get there, be prepared to lighten up on your long exposure. You want to look at the internals of a market when it's grinding higher, but especially when you have a major breakout such as we had over that two year down trend line I spoke about earlier in this report. It averaged 3.5 stocks up to every 1 that was down.

In addition, the participation was wide spread. Just about all sectors were involved. The market wasn't just carried higher by a few stocks but rather from everywhere. Leaders and all the secondary on down the line stocks were rocking. Nothing bearish there and with the entire market participating, the bears are going to have a hard time saying the breakouts weren't really all that good.

All that said, there are red flags. Back to those massive negative divergences. One has to wonder when that will all come crashing down. It will folks. It will. The divergences are everywhere, especially on many of the leading stocks such as Apple Inc. (AAPL), Google Inc. (GOOG), and more. This can not just be ignored. You add in overbought weekly charts with RSI's near or above the 70 mark and overbought short-term charts and you don't exactly have the best set up for continued higher prices without at least some selling to alleviate things.

It really should keep your wallet on the hip a little bit. It doesn't mean not to play. Some exposure is necessary. Full exposure is foolish. At any moment those divergences could kick in and kick the market out for a while, if not longer. The real question is, does it come now or later? Some very long-term charts are still buried in terms of the oscillators based on the massive bear that took place and they likely need to unwind further to the up side before topping out.

In addition, many stocks are still in great bases, bad divergences or not. I don't think this continues forever. This will end soon but not yet. Some short-term selling would be best but I think we'll hold 1018 or key gap support on selling for now. As long as it does, we should be fine. Stay with the trend, which is still higher overall.

Sentiment Analysis:


There are troubling differences when we look out at the numbers by services we trust to report this information. One, the AAII Survey, actually still has more bears than bulls which really does seem impossible based on the overall market action. I know many don't believe in this market but I have a very hard time accepting that there are still more bears than bulls.

Another well trusted service, the Investors Intelligence Survey, says there are now 25% more bulls than bears which does make sense. You usually need to get at least 40% more bulls than bears to get the market to start topping out. Either way, we're not at levels that raise too much of a red flag. 25% is getting there but there's room.

When we study what market players are actually doing, we see that the put call ratio remains mostly neutral. Readings mostly in the neutral .70's and .80's are what we're seeing most these days. There are occasional readings at extremes but they're not consistent by any means. Basically one-day events that do not follow through thus they can't be taken seriously. Bottom line is there still aren't too many bulls in this market. Far from perfect but we're not there yet.

Sector Watch:
Very interesting week on the sector front. The Transports blasted out of their base this week thanks to some favorable reports by the likes of Federal Express and others. We noted many base breakout moves in the Retail Group during the week including a base breakout move in Best Buy. The Commodities were mostly mixed. Natural Gas finally put in a strong reflex move mid week before selling off late. Oil remains contained in our recent $65-75 range but did sell off late week (see out 5th chart at http://www.swingtradeonline.com) further boosting the Transport Group. Gold also broke to a new Monthly Closing high above the $1,000 mark. The Techs and Financials were mostly mixed with the Semiconductor area showing some weakness late week pulling back off the top of its uptrend channel with some Negative Divergence clearly in place.

Thus to sum, you've got to pick your spots carefully with some areas performing well and others lagging, but on balance our rotational market remains in place for the time being. One final positive for the bulls is that the Shanghai, which hammered off our 50 MA last week confirmed that move by pressing higher by 4.5% this week (see chart 6 at http://www.swingtradeonline.com) indicative that a Handle is starting to form off that base. We are comforted by all the bearish press about the recent move lower in the Shanghai , which to our eye looked like a normal and healthy breather in a long basing pattern.

The Week Ahead:
This is an important week. We want to see what the bulls and bears have in their arsenal. We're very overbought and some selling would be best off the top of our Broadening Patterns seen in charts 2+4 at http://www.swingtradeonline.com. There is that critical gap support at S&P 500 1018 and this level needs to hold all selling if the bulls are to get the S&P 500 up to that 1060 gap resistance. If we do get there then we'll have to see just how much selling the bears will be able to bring in.

First tests of high profile Gaps tend to be difficult to clear on first tests. If the pull back from 1060 were to be minimal and grinding in nature, we may just be able to ultimately get to that S&P 500 1100 area, but by no means is that a guarantee and that's also probably looking too far out ahead. That's a lot to ask for one weeks worth of action.

The key for now is how the market can handle selling down to 1018 or buying up to 1060. Both levels will be powerful support and resistance for the foreseeable future. I don't think either number is likely to get taken out next week. If the bulls can hold support and unwind the oscillators, then they will remain in full control.

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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Mr. Steiman's commentaries and index analysis represent his own opinions and should not be relied upon for purposes of effecting securities transactions or other investing strategies, nor should they be construed as an offer or solicitation of an offer to sell or buy any security. You should not interpret Mr. Steiman's opinions as constituting investment advice. Trades mentioned on the site are hypothetical, not actual, positions.

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