It sure did feel good for the bulls as we rallied hard off the most recent lows that scared everyone who has ever been associated with the stock market. We went from the end of the world to what a wonderful rally we have going on here.

However, when a market rallies far off the lows and then hits the 20- and 50-day- and 50-day exponential moving averages it usually needs to pause for a while with a pullback whose magnitude will tell us a lot about this market.

How deep will this go? Will it go back to the 1122 gap? Will it hold at the 1150 gap?

Lots of discovery coming up shortly. The range is being defined and it's where it makes the most sense. It has set up shop at the 200-day exponential moving on the bottom at 1102 and rising very slightly each day. The top is at the 20- and 50-day exponential moving averages with the highest number to clear being the 20's at 1172. A 70-point range for the moment or roughly a drop over 6%. A pretty wide and loose range for sure.

The moves up off the lows at 1045 and drop off the top at 1220 have had very little in terms of basing thus this pattern is extremely wide and loose and thus prone to strong volatility within the range. Can cause lots of whipsaw for quite some time and drive traders crazy if you play too much. I warn you all about playing too much for now. You are going to suffer with many emotional exit decisions which will likely lead to unnecessary losses. Less is best for now.

The Euro continues to drop while the dollar continues to rise. With the CurrencyShares Euro Trust (FXE) or the euro breaking down today it does raise some eyebrows. However, it is getting extremely oversold with the daily RSI at 25 now and stochastic's at 10. You get the feeling that just when things will look their worst it will reverse and the stock market will start to hang in there as it fights back.
When the euro rises back the market should as well. The dollar is very close to making its inverse head and shoulders measurement and this goes along with the massively oversold conditions setting up on the euro or the FXE. Watch the PowerShares DB US Dollar Index Bullish (UUP) (dollar) and the FXE closely over the next several sessions. Watch for the reversal on the FXE from this breakdown.

Now the good news for the bulls. Bullishness abates quickly in lateral markets. It won't take long before the bull bear spread is down in the teens or lower, depending on how long this market continues to trade in this moving average range. The hands will get thrown up and sighs will be heard throughout the trading land. The bears will feel that they've taken over and they will ramp up the pessimism as the bulls quit and walk away. This would be the perfect tonic the bulls are looking for thus it's best that this handle lasts a long time. Not just weeks but possible months. The longer the better. Simple as that.

I know it doesn't seem like a lot of fun folks when markets behave such as they are now. You have to understand the energy this market used up from February to April in that parabolic move higher. It is wiped out for now and just needs time to gather energy back so it can try to move higher again as long as the news allows it to economically. It will still need a strong earnings outlook to continue higher but if that is in this economies future then the market will simply need time to gather its forces to drive higher. It may need more bearish action in terms of pessimism and it probably also needs lower oscillators. A deeper unwinding in the internals if you will. Time folks. Time!

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.

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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