Stock Market Follows Through After 50 day Failure Yesterday....

By: Jack_Steiman

Yesterday we saw the market gap up through 1119 or the 50-day exponential moving average. This is normally where right shoulder go to die. You get a move to and through the 50-day and then it tails down and fails overall to stay above at the close. You normally would expect the next day to be a rough day for the bulls but it didn't start out that way at all. We opened pretty flat and then moved up nicely with the Nasdaq up over 20 points. Surprising, but we all know what happens intra-day is truly meaningless.

As the morning wore on, the bulls wore themselves out and the bears started taking over. First, the Dow went red. We saw the S&P 500 go next, while the Nasdaq hung on tough. Eventually, the Nasdaq went as well and that was it for the bulls across the board. The market fell gradually, stair-stepping its way down, throughout the day with the markets closing on their lows. Poor behavior for sure yet as one would expect. The bulls tried all day to hold up above important support but just couldn't do it. Overwhelmed at the very end of the day. Bearish action, although by no means can we say we're officially in a bear market at this point in time. The bears get the knockout today however.

So what was really critical about today was the fact that we lost the 1105 S&P 500 price breakout. But wait, it gets worse. Far worse really. We also lost the 20- and 200-day exponential moving averages at 1102 and 1100 respectively. The gap at 1100 also lost. Bad news to see so many levels of support within a small price range get taken out in one day without any gap action doing the trick. Now the bears have the bulls where they want them and there are absolutely no excuses for them not to be able to follow through with a larger move lower, at least to the 1140 neck line once again.

Not necessarily straight down but they should be controlling things from here. To not be able to do so would be a colossal choke. The last hour today says the bears will be working overtime in the days ahead to get things done for their side. Losing all those critical support numbers in a single day at the very end of the day isn't exactly what one wants to see if they have a bullish slant on things. This is where things get very interesting.

You have to wonder just what the average investor can handle these days. How many bears markets or strong bear legs down can they handle over how many years? There have been two nasty bear markets in the last ten years. If this begins a third then you have to think a lot of people won't be coming back ever again. I guess this is the price we are all paying for the most massive greed market in history that took place in 1999 thanks to Greenspan and his clueless ways of throwing money in to the system unabated. The bubble burst on March 10, 2000 and the market has been in a secular bear market ever since with lots of cyclical bull markets thrown in. Are we about to take on a third bear?

It's way too early to tell but let's hope not. Just too many people would get hurt on top of those already in bad shape thanks to a crumbling economy. The economic news just out shows things are falling apart fast in all facets of our economy. Housing is really bad. Manufacturing is non-existent in terms of growth, and we already know there are few jobs being created overall in the private sector. Economically things look bad. Let's hope the market sees something out there down the road that turns things around.

So now we watch and learn and possibly short if things set up right on back tests. The bulls need to act fast to prevent another test of 1040. Here's the headache. We now have three full tests of 1040 that have held. You can only go to the well but so many times. A fourth time would put the odds much higher on it breaking down below. At some point you have to put these support levels in the rear view mirror or you'll be looking up to see it. These are dangerous times for the bulls. I'll be watching to see how the daily MACD's look on the way down. Can we put in another positive divergence or not at the bottom is key. Right now no longs seem the only way to play. Loads of cash and if right, some shorts. Day to day as always.

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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