It has been occurring for years. When the daily index charts get down to 30 RSI we seemingly always see a strong bounce take place. We hit those magic 30 RSI levels yesterday on the lows with the Nasdaq printing 28 while the Dow and S&P 500 came in with readings at 30. No good news took place overnight, yet our futures started rising slowly but gradually throughout the morning. We opened with a small move higher that soon became a trend day for the bulls as the bears recognized they had nothing left in the tank. They covered their shorts in droves as the market marched higher. Once it became clear that 1040 wouldn't hold any longer the bears threw in the towel.

We cleared 1040 with ease late in the day and finished with a strong blast higher, which allowed the indexes to close right on their highs, just a few points below a gap at 1060 on the S&P 500. The magic that the RSI 30 gave to the bulls can ramp up bullish behavior rather quickly but the market remains in a down trend despite the day's action. That could change shortly, and I'll discuss how shortly, but for now the overall trend remains lower. The RSI 30 gave the market a strong bounce today that understandably is giving the bulls new hope for the future, however, they have a long way to go before things get bullish from a technical perspective.

The question we now ask is what is ahead of us. Trend up days are common in bad markets when the rubber band snaps from oversold. Today was surely one of those days, but it doesn't mean things are good. The bulls will have to clear through S&P 500 1060 and 1067, which is gap and the 20-day exponential moving average respectively. Neither one on its own merits would be an easy catch for the bulls. The fact that they're so close together, at the very least we should expect a pullback once we get there. Getting though such difficult resistance on the first shot is basically impossible although we know nothing is truly impossible in this game, but you catch my meaning. It's not likely thus a pullback is in the cards shortly. How we pull back is key to understanding future results for this market. We have to be open minded to all possibilities but for now we expect a pullback rather shortly here and from that selling we will learn much more.

Now we all know by now that this game called the stock market is rarely about the truth, but rather it's about how to play the game correctly. This means to ignore reality and play what makes this game move. Two things make this game move. Earnings and sentiment and on the latter, the bears took a bad hit today. The bull bear spread is down to 2.2% more bulls. Almost par and that's just not what the bears want to see. It's not at extremes yet but real close. 5-10% more bears is usually when things get too far on the dark side. 37% bulls and 34.8% bears equals our 2.2% spread. Ouch! if you're a bear. When extremes hit, it really doesn't matter what truth is out in the world. The market will simply stop falling and climb that silly expression called the wall of worry.

On this front the bears are rocking and that's bullish for the market. On the earnings front, so far the numbers have been poor at best with key stocks getting crushed on the reports so the bulls are definitely in trouble here. If you owned FedEx Corporation (FDX) or Best Buy Co. Inc. (BBY) or even Nike Inc. (NKE) or Bed Bath & Beyond, Inc. (BBBY) in the past two weeks, you know the pain the earnings reports have caused you. You're well under water on those plays. So now with the earnings season starting next week in full throttle, we will learn much more about the economy. The earnings, if somehow better, can push this market higher, but for now that doesn't seem to be what we should be expecting. Sentiment is on the side of the bulls but earnings are on the side of the bears. Stalemate.

If the bulls can power this market through S&P 500 1067, which means getting through a huge gap and the 20-day exponential moving average, they are in business short term. I don't think that's going to happen on this move up but anything is possible. At the very least we should fall some here but if the next pullback is weak and on light volume, the bulls will likely regain control of this market thus this is a very important time for the stock market. This is a critical learning time for all of us.

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.

Comments

mw@dividist.com
08 Jul 10, 14:34

mw
Most interesting comment I saw regarding the bounce was a throwaway by Ron Insana on a CNBC wrap-up show yesterday. He intimated that rising expectations of Republicans regaining Congressional majorities in November may be changing market sentiment. Seems a reach but - who knows? Actually that was the 2nd most interesting comment. The first was a few minutes earlier when Amanda Drury turned to the panel and asked "Double-D or not Double-D? What do you think?" Really. She did. Video clip linked here.

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