Stock Market Still In The Handle...

Stock-Markets / Stock Markets 2011 Apr 17, 2011 - 06:28 AM GMT

The question is will it stay that way. The Nasdaq has made a clear handle bottom at yesterday's gap down low reversal at 2733. The top is clear at 2815. An 82-point range which makes sense. Three percent gives the market plenty of room to drive everyone nuts. Just enough room to head fake everyone on an almost daily basis. Handles are classic for making you think one thing is happening, but it doesn't. You can be so sure about what's next only to discover you were totally wrong about your thinking process. The more you play in a handle the more you lose. Very few can do it just right. The deeper problem with handles is that you never know just how long they are going to last. There is no historical reference for how long it will drag on. It could be just a few weeks, such as we have just experienced, or it can be months, sometimes many many months. No fun for sure.

The main goal of handles is to break down sentiment. There's no arguing we could sorely use that, and handles usually get that job done, especially when they go on for over a month. The bulls feel as if the top has been made. They start to feel as if the market has made its total run, and now things can only go downhill. The bears start to feel better about things because the handle is allowing them to see little upside action over a longer period of time. And that's the key. TIME!! The more time we spend going nowhere to slightly down the better things set up from a sentiment perspective. Those high bull-bear ratios start to drop precipitously. We were at 41.6% at the highs. Last Friday saw the number drop slightly to 39.1%. Hopefully, by today's close of action we're down to 35%, or so, but we won't know that until Wednesday morning. One thing we know for sure in handles, and that is to keep things very light.

You can't argue with the market action today. Google Inc. (GOOG) reported very poor earnings last night. The stock was absolutely crushed after hours by the tune of approximately $30. That gave the Nasdaq every excuse to just get hammered. Futures were barely lower. This made sense technically, however, since yesterday saw the market index charts print bullish reversals off the early gap downs. Google has lost some of its luster, but down $30 is still down $30, thus, it was pretty amazing when the market opened today and the Nasdaq was down only around 7 points. Add in a poor Apple Inc. (AAPL) performance, and when all was said and done today, the Nasdaq finished a few points in the green. Again, this was with Apple down to the tune of 5 points, which is big, and Google down a ridiculous $45.

It's stunning to see the market green. It had to be a real source of frustration for the bears. Who could blame them, really. What didn't happen for the bulls today was they failed to take out that huge gap on the Nasdaq at 2771. We got within two points but could not get through. The good news for the bulls is that even though we didn't get through, the Nasdaq hung in there quite well. Up is up with Apple and Google so horrific.

The market has been separating what it likes and doesn't like in this handle thus far. It's clear that technology and financial stocks are not high on its buy list. Chemical and restaurant stocks, however, are high on that buy list. The market is using froth with regards to the technology stocks, and the usual dead sector in the financials to keep the market from breaking out again. The market will allow those stocks to run again in time, but for now, it's using froth and bad earnings to keep things from getting too out of control on the upside. That's not a bad thing either as sentiment still needs to be worked off.

Sentiment is the catalyst to get this market to create this handle and it's still at work keeping things under control for both sides. Nothing big to the upside and nothing big to the down side. Liquidity is providing some buffer for the bulls, but sentiment is providing the buffer for the bears. The beauty of handles can be, that because the market goes nowhere over an extended period of time, folks start to get more sour on future prospects. This alone can bring those sentiment figures down where the bulls need them to go.

The gap down at 2771 Nasdaq is critical for the bulls in the days ahead. A simple gap up on Monday could take this key level out. If we can get through, a move back up near the 2815 level is possible. At 2815 it gets harder still for the bulls as this is where the last high died due to it being a sizeable gap. A move up there could then see up come right back down for yet another test lower in this ongoing handle. Again, nothing wrong with that as it brings about frustration. The bulls would expect a blast out, and if that doesn't occur again, it would get them more dour on the future.

Things are always unclear in these handles so all we can do is watch critical levels of support and resistance. For instance, 2733, or yesterday's low, is big for the bears. If they can rid that level they can bring this market lower in a hurry. So it's all about 2733 on the down side and 2771 on the upside short-term. If 2733 goes we go to 2690/2700. If 2771 goes we see the 2815 area. Keep things very light here. Bases are setting up, but for now we watch 2733 and 2771.

Do something nice for someone this weekend and every day, if at all possible. Spend time with a child. It'll make you feel good about everything.

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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