Stock Market Failure At The 50's....

By: Jack_Steiman

And a nice head fake it was indeed. The Yuan news from overnight out of China got the futures rocking much higher than that news seemed to be worthy of, but hey, who is to argue with good futures when you're long on the market. The futures held all night and right up until the bell rang to open trading for the day. Once we gapped up the show was over for the bulls. A nice huge breach above that 50-day exponential moving average at S&P 500 1119. Sweet indeed, but if you looked at the daily charts such as I did, there was a major red flag sitting there in the form of extremely overbought stochastic's. Reading in the upper 90's is not where markets usually continue to rise from.

The 60-minute charts added to the overbought daily chart headache by flashing overbought stochastic's as well. The market slowly but surely started to reverse with the selling starting to accelerate roughly halfway through the trading day. A 140+ gain in the Dow gone by the close, although it did finish a bit off its lows. The Nasdaq reversing over 50 points high to low. The S&P 500 reached 1131 only to close well below the 1119 50-day exponential moving average. A very bad day for the bulls for sure. No way to spin it, but not all hope is lost medium-term even if the short-term doesn't look wonderful.

I've talked for weeks about how the S&P 500 needed a right shoulder to form in order for a head and shoulders set up to be in play. Never a guarantee that these patterns work out for they are undeniably the most unreliable patterns in the game. However, the pattern is alive and the S&P 500 definitely needed that right shoulder. It has it now with the classic test of the 50-day exponential moving average. A breach above and failure, and for now a lower right-shoulder high than the left-shoulder in place at 1150 from January. The set-up is there for the bears to run with. Whether they'll get the job done is very unclear.

So, why would that patterns success be so difficult for the bears? Well, let's look at those MACD's off the most recent positive divergences that have been playing out. They have shot up with price, thus confirming the move. If they had lagged then it would be easy to say that this market is going to get slammed, but that wasn't the case at all. It would seem likely that any move back to 1040 on the S&P 500 would create another higher MACD or positive divergence. I can't be certain about that, but my eye seems to think that will be the case. My eye hasn't gotten pretty good at seeing what's to come on those MACD's. The bears may not push things too hard if we begin to fall and they see those MACD's are not turning south too fast. Things have gotten very interesting for the short and medium-term.

Of course, the other huge issue not in favor of the bears is how fast sentiment has changed from too bullish to getting close to extremes on the bearish side of the ledger. We're not there yet, but I can 100% guarantee that if we got down to 1040 on the S&P 500 again, we will have inverted bears to bulls. It doesn't usually get too far below par before the extremes kick in at too bearish. Now, it doesn't have to work out that way. It can be that we get to -35% before the bulls kick back in, but historically it usually only takes a -5/-10% before things get reversed.

For today, we saw the reversal after the head fake over the 50-day exponential moving average. Not great short-term. The market has excellent support at 1105, the old highs just taken by the bulls but then it also has great support at 1101 or the 20-day exponential moving average and then 1099 or then 200-day exponential moving average. Loads of support between 1105/1099. This makes the job more difficult for the bears. After today's action it would seem it'll be a breeze for the bears to take out 1099 but I don't think it'll be all that easy although they now have control of the ball. A day at a time please. Slow and easy here.

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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