Stock Market Bad Week, Nasdaq Doji, Weekly Bearish Engulfing Candles......

By: Jack_Steiman

A week where stocks are down nearly 4% across the board would have to be considered a bad week for the markets. But point losses alone don't necessarily tell the whole or the true story. The question to ask is whether the move down this week is a harbinger of things to come. I will explore this in as much detail as possible.

It is complicated for sure with no easy answers. All I can do is weigh the odds on what will take place based on how things are currently set-up in their patterns and how the oscillators are reacting to price. We know this week was bad for the market coming in to today thus the bulls were hoping to take back some of those losses. You knew that chore would be difficult simply because we got the final quarter report for Goodrich Petroleum Corp. (GDP) before the market opened, and it disappointed, just as many other recent economic reports have.

A 3-handle expected. We got 2.7% instead as the stimulus-ism clearly winding down. The market refused to gap down on the news but the move up was tepid at best. The day was spent moving lower only to recover. We closed basically flat and with a doji on the Nasdaq, which I will discuss shortly. A bad week for the bulls. A great week for the bears, but in the end, the market is still generally in the middle of its range.

Hard to believe after all of this negative action that we're still in the middle of nowhere. The bulls spent a long time trying to capture 1105 and finally did so. It didn't last as it got lost this week. Because they first claimed 1105 and ran it up to 1131 before retreating, the strong move down this week put the S&P 500 at 1076, a full 36 points or 3% above critical long-term support or the triple bottom at 1040. The new range being 1105 down to 1040. The Nasdaq led the way all week up and down, which complicates things since we're in the middle of the range. A true break of 1040 or 1105 would make the behavior truly matter.

Leading in a whipsaw market makes things tough to decipher. It is truly a difficult market to understand. Hard to imagine how the market can be holding up as well as it is with so much bad news all over the place. Poor earnings reports. One after the other which I've discussed the past few nights. Poor economic reports day after day yet we are holding up decently above 1040. When markets are this tough the very best thing to do is stay all or nearly all cash. We're only in one play here. The reason for taking a play to be talked about shortly. Bottom line is the market is holding up better than one would expect but that doesn't mean mid term things won't fall apart.

We look to the oscillators to let us know what we believe is coming down the road. Let's start with today's doji on the Nasdaq. A doji is normally associated with a very short-term change in direction. The Nasdaq opened and closed at the same price and after a strong move lower. A doji usually, not always, but usually, means a little rally is upon us. With the news so bad out there there's no guarantee, but that's normally what takes place.

Nothing should be great in terms of upside should we get this little reversal up, but you have to respect the stick and thus the one play. Looking past today we need to look at the daily charts and the message they may be sending to us. We see that ominous head-and-shoulders pattern in place. Six months worth of set-up. If the market were to lose 1040 with force we see, the 180 point measurement from neck line to head and that could mean S&P 500 860. Hate to think what that would mean to the economy should that occur. Let's hope we never have to know, but it's possible.

However, if you want to try to take something positive out of this set-up you need look no further than the MACD, which has refused to fall thus far during this sharp move down. Then slow line on the MACD has raced up to meet the fast line. Usually the fast line races down. This by no means guarantee's all is well. Not at all. Just an interesting take and gives a little hope short-term, but means nothing for the mid or long-term outlook. The MACD can hang in there a bit longer and even turn up a bit, but then can come right back down hard. That's when things could get ugly. They can get ugly right here, but the set-up suggests a little breather for a spell before things likely get tougher again.

Now for the worst news for the bulls from a longer-term perspective. We had an engulfing candle printed for the week across the major index charts. The Nasdaq, S&P 500, and others printed weekly candles which are set up for your viewing tonight when you study the charts that show how we took out all of last weeks up sticks. Never good to see outside or engulfing sticks. Shows real weakness. They often are a prelude to much weaker action in the weeks to come, even if the action is not immediately to the downside. We got a monthly engulfing stick in January but that one didn't work, so there's still hope this one won't either, but unfortunately, they usually do play out over time and thus it's a real red flag that must be respected.

Here's the bottom line. Things are confusing at best. Real red flags that we will, over time, break down below 1040 but there is a doji as I mentioned earlier on the Nasdaq, which normally gives the market a breather from the selling. Not every doji works. Nothing is 100% in this crazy game. The outside sticks this week are bad normally bad news longer-term, so we'll just have to watch things.
The whipsaw back and forth above and below key resistance and support is driving everyone nuts and causing a lot of emotional decisions, which normally means a bad trade. The very best thing we can do is keep things extremely light no matter which way you play. One play or maybe two is all you can do and you have to keep it light for sure. I will not be getting aggressive until things become far more clear. Overall I don't like the look of the market mid- to longer-term, but we can all hope things turn somehow.

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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