Stock Market Finds A Way...Expect Some Chop Next Week...

Stock-Markets / Stock Markets 2011 Feb 26, 2011 - 04:35 AM GMT

It found a way to get back through the 20-day exponential moving average. The Nasdaq tested down two times yesterday below the key 50-day exponential moving average, but closed above while showing a positive divergence on the 60-minute short-term charts at that double bottom. The close above with the positive divergence told us a move up off oversold was on the way, but I didn't expect the 20-day exponential moving averages to be captured back in one day. This is why you never short a bull market. You should rarely play counter trend. If you want cash that's fine, but counter trend playing makes little sense. 2769 was the level the Nasdaq needed to take back and it did just that. Nothing explosive above, but above, nonetheless. Impressive. The price of oil had led this market lower. It printed near 103.00 per barrel yesterday, and that was the reason for the brief loss of those 50's on the Nasdaq. The S&P 500 and Dow never fell below.

Oil put in a huge reversal stick lower yesterday and not coincidentally, the market started to recover. Today was the follow-through back up, although the market has tremendous resistance not far away due to a large open gap from the recent selling. Oil took us down and oil took us up, and because it's such an unclear situation overseas, you really can't count on things staying too stable with regards to the price of oil. If things get violent, oil starts to run up, and if things calm down, oil goes down with it. Unrest brings higher prices unfortunately. So it tells us nothing is truly safe as things work themselves out overseas, but it was good to see oil pull in yesterday in such a dramatic fashion. No one wants to see oil surging over $100 per barrel. The inflation risk would be terrible for the economy and for the stock market on some level. For today, the market found a way to creep back over the 20-day exponential moving averages and this takes some of the steam away from the bearish case short-term. Not totally by any means, but for the moment it's better news for the bulls.

If the bulls want some good news from today's action it is that the market may be setting up a large symmetrical triangle which normally plays out bullish, if the pattern preceding it was bullish, and it was. There is never a guarantee as any triangle can break lower. However, it is good news technically, if we can set up this triangle. It offers up the possibility that the lows on the Nasdaq at the 50-day exponential moving average the past two days may act as great support on any selling to come. The triangle represents the bulls ability to hold things up until they unwind deeply enough on the major oscillators.

There is no time frame for the length of these triangles, but the best way to play is to buy whenever you get closer to the bottom of it, and go mostly cash as you get to the top. You don't really want to fool around shorting much due to the primary trend being bullish overall. Make no mistake about that folks. It doesn't mean you can't short at all, but doing too much in that area will likely cause major frustration. Triangles are very emotional with strong swings both ways. Best to play in the direction of the overall trend and as you get closer to the bottom of the triangle.

I'm always looking for a change of character and whether that change is relevant or not with regards to the market in the short-term. Over the past two days we had some earnings reports that were rewarded, rightly so, or not, but we saw many of them print black candles by days end meaning on balance sellers for the day once the stocks gapped up at the open. Not the very best of behaviors. We saw that from Priceline.com Incorporated (PCLN), Salesforce.com (CRM), and Deckers Outdoor Corp. (DECK) over the past two trading days. Is it really relevant? Not sure. It could be just a timing issue for those plays as the market has been slightly down trending the past week as we all know.

Some stocks did hold the majority of their earnings gains, but some leaders like the ones I just mentioned didn't print the very best of candle sticks to be sure. It's just a small red flag, because, ultimately, it's the market action overall that talks, and today we saw strong action in the overall market price action. You don't want to say the whole market is in trouble just because some leaders didn't print the best candles. Clearly we saw money come in to other areas and maybe these stocks just got a little ahead of themselves and needed a rest, thus, the black candle sticks by days end. It's just important to note things as they develop. You're always trying to learn I would hope.

The market gapped up today after the successful test of the 50-day exponential moving average on the Nasdaq. This is extremely important as it puts a critical level of support above that 50-day area. If the market had moved up today off a flat opening, the technical shape of the market would be much weaker than it is now. Gaps offer wonderful support, or resistance, depending on where they occur, of course, and this gap off the 50-day test is huge for the bulls as it brings about an added level of safety to their minds when determining whether to buy or not. If they think they have good support close by in both the gap up and the 50-day exponential moving average, they will be more willing buyers. Gap and 50-day so close together really adds confidence to their game.

Good to see the bulls find a way to get things rolling off the 50-day test. Often what can happen in an overall bigger picture bull market. With 2808 now tough resistance for the bulls, at least now they can say 2715 and 2751 are good levels of support. Take a look at our 6th chart below of the Nasdaq to see whether you can locate these levels. Expect a pullback of some type short-term if we test up towards our 2808 Gap on the first test then we could test back down to one of our lower Gap areas. Thus, expecting some choppy action in the week ahead. Slow and easy as always here folks.

Have a great weekend and do something nice for someone because you can.

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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