Stock Market Understanding Where We Are....Is it A Bear?..Still A Bull?...

By: Jack_Steiman

The evolution of a market is never easy to fully understand as there can be so many "obvious" messages built in. It's obvious we're this, or it's obvious we're that, when in truth, nothing is very obvious at all.

Let's talk about what we do know. We know that the market at this moment is in a clear down trend. Today does not change that one bit.

Let's talk about what's not clear or obvious. That we're in a bear market.

But Jack! You're all saying. Have you lost what little is sitting between you ears? Have you lost your mind man?

No, not yet, I tell you. That comes in a few more years. So, let?s discuss why we're not in a bear market from how I see it. And it may be that we are, but I have no confirmation and I'll tell you why.

A bear market exists when you have the following. This is my definition. The entire market, not just a few sectors, but the entire market, loses the 200-day exponential moving average with force, back tests and then gaps down off that failed back test. High volume comes in on that failed back test as well. The key to this whole scenario is the "whole" market. Not just some sectors or indexes but everything in harmony. All down and out. Not some. All back test and fail at those lost 200-day exponential moving averages.

We DO NOT have that currently. As of yesterday's poor close, we had the WLSH, Dow and S&P 500 all below those critical 200-day exponential moving averages, but we did not have the semi conductors, retail, transport or Nasdaq below. All above those 200's. That tells me that while we are in a confirmed down trend, that down trend is not strong enough to create a bear market to this point. That could change but at this moment it is only a down trend. Way too many sectors are only pulling back, but clearly they are still holding their key support level at the 200's. Many are still well above.

I won't say we're still in a bull market for that would be silly, but in truth, all we're in is a down trend for the moment. Nothing more. Not a fun market. The bulls are fighting for their bullish lives but all hope is not lost if you are a bull who never wants to think about being anything else. The bears have hope as well. They haven't gotten the job done yet but they're trying and still have a shot at succeeding.

So, who has the real upper hand here!!?

Let's break things down. The S&P 500 is forming a head-and-shoulders pattern that, if it plays out in full, would measure down to levels no one wants to think about. Head-and-shoulder patterns have a lower than normal success ratio of playing out. Why? Because bear markets are rare. Markets go up far more than they go down, even if price goes nowhere over several years. Markets are almost always higher. Bear markets wipe out years of gains in weeks or months, but even with that, markets almost always go higher. This is why many head-and-shoulder patterns frequently fail. However, when they do play out, they are nasty. This particular head-and-shoulders pattern is quite large, so let's hope for the sake of 401k's out there that it doesn't play out.

So, with these patterns being unreliable what else can we look at?

Well, the bull bear percentage is down to 11%. If it gets near flat that's not good for the bears. One more leg down would accomplish that. In addition, with MACD's compressed on the daily charts, one strong move down would likely create a positive divergence from well below the zero line and this, too, would likely end the down move. All of this tells me that the likelihood of a major bear market is unlikely here. Possible yes. Likely, no!!! We take it day to day as we figure it out.

So, where are we today?

We have very compressed MACD?s and thus the reason for the one long play. I feel strongly that we're going to get a right shoulder somewhere between the 20- and 50-day exponential moving average. 1125 or thereabouts makes sense but that's just an approximation. When we get there, if we get there, it'll feel like we can't go lower. That will be a mistake in your thinking. We can and likely will. That move down will be incredibly important for the future of this market. But that's for another time.

Getting to the 20's and 50's on the daily charts will set a perfect right shoulder. One that tests important moving averages but still falls short of the left shoulder at 1150 set in February. I would not suggest getting aggressively long, but again, I feel sure that we will test higher in this pattern before we turn down again. I don't think shorting is appropriate right now. Too early. The last push down put in a higher low and with those MACD?s compressed, longs would be best for now, but again, very little at that. One to two plays at the most. As always we take things day by day as we try to figure out this nutty game.

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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