Stock Market Sentiment Selling Under Way...50 Day Ema's All Gone

By: Jack_Steiman

We started the day with a move lower once again. Markets across the oceans were lower and thus so were ours. You could feel the fear of buying after the selling over the past few days. During the week nearly all of the major Indices we track broke through not only our Rising Support Lines off the March Lows but also our 50-EMA support levels. Bigger picture if you study our first chart today of the S&P 500 monthly. The market stalled out at our highlighted backtest of our 2008 breakdown area at our 1150 Resistance Zone which is clearly seen in our first chart.

In the 3 charts to follow the Daily S&P 500, Dow, and Nasdaq we made clean breakdown moves below both our multi-month Rising Support Lines and 50-EMA's in a "flight to the exits" type of move. When sentiment gets as bullish as we highlighted in last weekends report, conditions are ripe and odds high for a decent corrective move based on historical precedent, which is why we've been able to avoid the downside carnage seen this week.

Think of a spark plug. The engine starts when the key is turned and the plug gives that spark. You see that small electric current passing through and you get the desired result. I have talked about sentiment for some weeks, flashing that red flag that the bull bear spread was getting too frothy. Slowly but surely the risk was increasing in the market as each week seemed to bring slightly more bulls and slightly less bears.

Sentiment is NOT an exact timing mechanism. It needs that spark to finally kick in. There weren't any sparks available to the bears thus the market kept crawling higher. Small sticks up but up nonetheless. Where would that spark come from is what the bears were asking themselves. The sentiment issues alone made the climb up difficult for sure but the market still refused to sell. Yesterday, early in the morning we saw the President of the United States make a speech about bank/financial regulations. He basically said the noose was around the neck of these institutions now and that they would no longer be able to haphazardly just make risky trades without consequence.

The government would no longer be there to help them. To bail them out.Restrictions would now exist to curtail what they could do. THERE WAS YOUR SPARK!!! Goldman Sachs (GS) fell 10 points in a matter of minutes. All the financials/banks fell apart. The selling was under way. Then came spark number two. That it was increasingly uncertain that Bernanke would be reappointed. Two sparks equal 5% in a few days to the down side. The sentiment issue finally had a few spark plugs added in and down we went.

Before the selling started I spoke about how it was likely we would test the 50-day exponential moving averages across all the major index charts once things got going. It was my thinking that we would hold those 50-day exponential moving averages with the possibility of a slight breach. WRONG! We went through those 50's like a hot knife through butter. Not good. The leader, the Nasdaq, was the last to go but it too went without a fight. All of the major indexes are cleanly through here and it's about now or never for them to capture those levels back. Many months back we lost the 50's on the S&P and Dow but the Nasdaq never lost it. No confirmation. Now they're all gone. Add the Wilshire 5000 and the news is not good here.

The question we now have to ask is whether we're in a correction or something much different. That is a total unknown at this time but the door is now open to that something else no one wants to deal with. The story remains unwritten so we have much to learn in the weeks ahead but this isn't what the bulls wanted I can guarantee you that. Healthy markets correct back to the 50's and then start the climb all over again as we have seen on four different occasions since the March lows of 2009. The red flag is up. The next few weeks will be critical and extremely interesting.

There is a problem here with volume as well. Volume is only important at key inflection points within the evolution of any stock or index chart. When you approach critical support or resistance, whether it be horizontal, wedge or trend line, you want to watch how volume does or does not pour in. When we broke the 50's over the past two days we have seen volume accelerate quite dramatically. Major distribution for sure. No one can argue that point. It is what it is and since the volume was huge as we broke, it tells us that getting back through the 50's to the bullish side will be very difficult to say the least. Big money let it go thus big money will defend it as resistance. Volume spoke loudly the past few days. We need to be listening.

To wrap it up, there is a real danger here for this market. The 50's just didn't stop this move down the way healthy markets normally do. It's not hopeless here by any means at this point in time for the bulls but they need to get moving and moving soon or those 50's will get further and further in their rear view mirrors and we know what that means. 10,400 Dow, 2231 Nasdaq and 1113 are those 50's that need to be taken back soon. Interesting times for sure. Please play with extreme caution here. Cash is best for the moment as we're too oversold for shorting but with the action being what it is, longs make no sense as well.

Sector Watch:

Many key Sectors started to make breakdown moves this week mirroring more or less the broad market. The Financials were under some of the heaviest pressure thanks to some likely imposed trading restrictions to come by our government announced mid week. The Transports seen in our 6th chart broke through both our Rising Support Line off the March Lows and our 50-EMA Support areas which opens the door for a deeper corrective move. The Retail Sector followed suit. Most Technology sub-groups broke down through respective 50-EMA's including the Telecom, Semiconductor, and Software areas. The Commodities/Metals were no place to hide with Gold/Silver and the XAU Index plunging hard during the week. During strong pullback moves we find CASH the best safe haven rather than any specific group or sector.

Peace

Jack

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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