Stock Market Hanging By A Thread.....

Stock-Markets / Stock Markets 2010 Nov 18, 2010 - 02:46 AM GMT

For now that is the best way to explain how it's doing with regards to those key 50-day exponential moving averages. Barely hanging above them, but not exactly exploding away from them, so they're far away in the rear view mirror. We are testing close to them but not getting the push off that we've become accustomed to in this up trend over the past several months. The problem for continual upside is those nasty sentiment issues I will touch on later on in this report.

Every time we've seen selling over the past few months it was immediately bought up by those anxious bulls that were desperate to get in on the act they've been missing. So while today wasn't a bad day for the bulls it wasn't exactly what they'd like to see based on the proximity of those 50-day exponential moving averages. No explosion up yet. Maybe that's coming, but I don't think that'll be the case.

We tried all day today to get those Dow and S&P 500 stocks moving, but very poor action in the financial and oil stocks didn't allow for them to participate to the up side very much. Small rallies kept occurring but they just couldn't extend upward. Sellers quickly coming in to keep the excitement down. There were a very high number of attempts to rally off the 50's, but when a market is full it gets tougher, and today was no exception to that rule. The problem here is these failed tests higher open the door to the Dow and S&P 500 losing those critical 50-day moving averages. If that happens it would be a true change of character and open the door to the trend line test at 1140 on the S&P 500. That's the next big support level. Things are getting interesting here as we move towards an inflection point for the short- to mid-term.

Let it be understood that if we lose the 50-day exponential moving averages it doesn't mean market death is imminent. Not at all. It would mean a likely period of mostly lower prices are upon us short-term sure, but once we can unwind those sentiment issues, things can turn back around quite quickly if the news is good enough on the economic reports to come with regards to economic growth or stability. I wouldn't argue with anyone that losing those 50-day moving averages is a good thing or something to be ignored. I wouldn't be that foolish. However, it's important to keep perspective. There are still many areas of the stock market doing very well. Retail is super. Transports aren't bad at all. There are areas that stink. Homebuilders stink. Financials are beyond stinking at this point with their recent higher volume breakout failure. Now they're breaking down.

Let me point out that we do NOT see distribution volume yet off the top. Not great but not continuous distribution such as we saw at the top on the iShares Barclays 20+ Year Treasury Bond (TLT), and are now seeing on SPDR Gold Shares (GLD), and iShares Silver Trust (SLV). Earnings are still being rewarded when solid. When earnings are not being sold haphazardly, and when you don't have major distribution volume at the top of patterns, that's not longer-term bearish. Only sentiment is a big problem now. Just keep that in mind before getting too bearish longer-term.

So let's discuss the issue of sentiment, which I consider one of the big four things to look at when deciding the type of market we're in at any given moment in time. The other three again being distribution, or accumulation volume at tops or bottoms, divergences on the daily charts at tops or bottoms, and how earnings are handled when we're in a down trend or up trend. Sentiment is a huge part of the equation, however, and must be respected for the short-term direction of a market.

Never ignore the message from this key market indicator. The bull bear spread is now 36.0%. The top in May occurred with a reading of 37.3%. Basically, the same here, and thus, a massive red flag for sure not to be ignored. The move down from those readings in May was huge. We have to be on guard for that here as well. We are going to need to create fear to bring those numbers down folks. No way around it. How deep the selling has to get is unclear for sure, but we'll have to see lower prices in time so we can get rid of this short-term froth from the bulls. Lower prices, and thus, fear is the only medicine. So yes, it's only one of the four things I look at, but it's important for the short-term.

The 50-day exponential moving averages are at 1169 on the S&P 500, 10,989 on the Dow, and 2539 on the Nasdaq. The Nasdaq is the leader, and thus, is the furthest away from testing, but the Dow is right there, and the S&P 500 is very close. Some key stocks are already breaking their 50-day moving averages. All of the sector charts have lost their 20-day exponential moving averages with gaps, which makes getting back through to the up side very difficult for the bulls 1140 is the long-term trend line if we do lose those 50-day moving averages. We are learning from here and would love to short some if we can get those 60-minute charts less oversold. I'd mostly stay away from longs for now. Do what feels right to you, of course, but easy on the long side here. The market needs fear and I think it'll get it in the weeks ahead.

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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