Stock Market Selling Finally Here... A Look Ahead...

Stock-Markets / Stock Markets 2010 Nov 13, 2010 - 06:14 AM GMT

It took long enough but the selling has finally kicked in for this market. It has done so in a pretty strong way, especially after today's move lower where the very heavy majority of stocks finished in the red. Finally some widespread selling across the board, which is something that has been missing for some time now as the bears tried unsuccessfully to take this market down. The selling isn't likely done for a while longer as any small bounce up early next week off of oversold 60-minute charts should be sold off again with the market likely testing down to those 50-day exponential moving averages before any further attempt is made to move higher once again. It's extremely normal for markets to test those 50-day exponential moving averages. What does matter is how the market reacts on those oscillators to the buying that will occur off those 50-day tests.

Price should move up nicely but will those oscillators? That's what we will find out and that's what will be telling for the mid-term market movement to come down the road. You should be a little more patient here before getting more aggressive, which again, should take place once the index charts test those 50-day exponential moving averages. For now we can say the market is following the map it should in that it tested down to the 20-day exponential moving average at 1195 on the S&P 500 and should bounce a bit early next week before testing the 50's. This selling will have allowed a very decent pull back in there daily oscillators to a neutral level, which this market desperately needed and will likely get.

The financials had made a beautiful move higher on big volume last week. It was really positive from a technical perspective. No one will argue with that. What's surprising is the large move down off those highs, and how a full test is under way and threatening to break lower. If the early week market bounce up doesn't blast these off then they're likely to lose that breakout.

If they lose the breakout, that is definitely more bearish for the mid-term in this market. They needed to get going and did so just when the market needed them to. Why they're behaving so poorly on this pullback is hard to understand, but we have to except it and not question it. If this continues once we bounce a bit the news won't be good for this market, thus, we will have to keep a real intense eye on their behavior in the coming days. So far, not so good at all, but the story is not written yet. The bulls have a major concern here though for sure. The bears have hope once again.

The market had been looking for a catalyst to start the needed pullback off the highs and Cisco Systems, Inc. (CSCO) provided that exact thing. A real catalyst, an excuse if you will, to get the bulls to slow down and to allow the bears to get more aggressive. CSCO was absolutely annihilated. No mercy. The worst post-earnings move lower in their history of nearly 17%. That's not something to take lightly, and does raise at least a red flag that we have trouble here for the entire market. It's only one stock but an old leader, and they have never been taken down like this. So I can't help but wonder if there's a deeper message here.

Now the market will need a different piece of good news not known to it if it's going to be able to take out the recent highs at 1228. That won't be easy, but some type of retest of that level should occur once we test down near the 50-day exponential moving average. CSCO continued lower today, and is near the twenty dollar level, which seems awfully low for a stock with their cash on hand. The valuation seems rather low, but we're not seeing anyone really defend it. Not great behavior for the stock, or the market, but again, it's only one stock and many other stocks in that sector came back nicely so that's good news.

Folks, to be blunt, the market will soon be up against and facing some critical issues with regards to whether the top is in or not. We were up on a high pole for a very long time. The market refused to sell and we were lucky enough to play it up at overbought for quite some time. The market has finally snapped lower. Nothing intense as of yet. We should try higher again off the 50-day test, but that will be where we gain some deeper insight. We may have to face some realities we don't want to or won't like facing very much. It's unclear, but we always have to be open to the message of the market. Never fight it. It's a losing proposition to do so. If the move up says to get bearish we will. If we start to see distribution volume as the top we will adjust to that.

On the other hand, if we don't see bearish signs such as distribution at the top, it likely means the market is simply consolidating longer-term before moving much higher once again. Once a market has made its measurement such as 1220 on the S&P 500, it can take many months of back and forth action that trends mostly lower before the market can gain enough strength to move higher once again. So for now, we are in the learning phase of this market's longer-term intentions. We'll play it as we see it, of course. The up trend remains confirmed until the technicals tell us otherwise. There's nothing wrong or bearish with the selling currently taking place.

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 constitutinginvestment advice. Trades mentioned on the site are hypothetical, not actual, positions.

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