Stock Market Bears Big Test Is Here......

Stock-Markets / Stock Markets 2010 Jul 07, 2010 - 03:10 AM GMT

So why would I write such a thing with the bears so fully in control of the markets, you ask?

Because this is where the bears keep losing control of the markets. I'll explain.

Outside of the 2000 bear market, which was the worst in history for all intents and purposes, whenever the RSI hits 30 on the S&P 500 on the daily chart, the market bears usually spit the bit and the market rallies higher. We can go a little bit below for a day or so, but that's followed immediately by a sharp move higher. Bear after bear move has had the same results. RSI 30 or a bit lower for a day or so is all you get, and then you run higher. Some of the moves higher have been quite strong. No way to tell how strong but the S&P 500 has strong resistance between 1040 and 1060. Higher than 1060 would be a true surprise. I think 1040 has little chance of holding here for a day or so, but we saw with today's action how tough 1040 will be for the bulls. They tried numerous times but failed, so again, how far do we run? I don't think beyond 1060, but we'll just have to wait and see. RSI 30 has been the kiss of death for the bears. The onus is on them to prove that after many years they can cause a sustainable down trend below RSI 30.

We started out with a strong gap up today after overseas markets finally bounced from their oversold conditions. China started out in the red but found a way to bounce hard. Our futures, with fair value, was down 135 points last night. Once China bounced so did all of Europe and in a big way. We reversed our futures over 200 points and thus up we went at the open. The market climbed slowly for a short period of time allowing the S&P 500 to make it to 1042, the current wall of resistance. From there it was all down hill for the rest of the day. All of the index charts went red for a short period of time before recovering very late the moment we hit RSI 29 and 30 on the Nasdaq and S&P 500, respectively. Not great action for the bulls, obviously because we closed so dramatically off the day's highs, but the 30 RSI readings on the daily charts should save them for now.

We need to turn our attention to today's internals and they don't show a pretty picture for sure. We see the Nasdaq, which finished green, had a 2 to 1 reading in terms of decliners over advancers. Not what you want to see when a market reverses off a 30 RSI. It shows nothing more than oversold. It shows that just a few stocks carried the index back up instead of the whole index performing well with everyone chiming in. The internals also showed declining volume for the day when things were up early on. Today's internals suggest nothing more than a bounce off oversold. Things will have to improve dramatically for that to change.

When looking at the health of a market you also want to look at how you close, and each day we are closing poorly in terms of being well off the day's highs. We closed 43 points off the days high on the Nasdaq, so please don't go expecting a major rally here even though we're at RSI 30 across the board. It is possible to get to the trailing 20-day exponential moving average on the Nasdaq near 2190. We also have a gap at 2180, but there's no guarantee we get that high, especially since the advance/decline line was so poor today and we closed so far off the highs as I just suggested.

There really isn't anything that looks good from either a fundamental or technical perspective other than 30 RSI's, but again, that has been a magical level for the bulls to which they can create a rally for some days or even weeks overall. If we move laterally and unwind those oscillators, look out below over time. A day at a time as we watch things unfold but overall things are still far more bearish than bullish medium-term.

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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