Stock Market Shifting....

Stock-Markets / Stock Markets 2011 May 21, 2011 - 07:30 AM GMT

That's the best word I can use to describe this market. It's shifting from acting as a bull to more of a bear, or better yet, a correction in the making. Upside is becoming more strained. The bulls are struggling to gain some steam as those weekly negative divergences across the board on all the major index charts are holding the market down. In addition, on the last small move higher, the daily MACD didn't turn up at all, which isn't what you want to see if you're a bull expecting the next leg up in this ongoing bull market. When oscillators act more strained you know it's going to be a tough time to get going to the up side. So you need to respond accordingly, and that means, simply, to take the foot off the gas and slow down dramatically.

Lots of cash should be the way you go about playing this game for now. You don't want to jump in too fast on the short side as the bears need to take out multiple levels of support close together to make the market bulls shake nervously. 1315 is the level on the S&P 500 that would have the bulls on their knees shaking with fear. If the bears can ultimately remove 1315 from the equation then they would have the ball in their court with full control of what's taking place on the field. Above 1315 they have no control, but right now, neither do the bulls as more and more stocks are breaking down below their 50-day exponential moving averages. Fewer stocks holding things up for the bulls. So we're at a stalemate for the moment.

The tide is shifting more bearish as the bears put in another gap down today. That's two in the pattern for the bulls to try and work through, and let's face it, the single gap at 2828 Nasdaq was holding things back. Now you add one at 2820, and the job just got a lot tougher for those bulls. Bottom line is the wedge is holding on both sides, but we're seeing a real shift lately towards more bearish action so be sure to adjust accordingly.

Understand these wedges for what they are. A channel from which a trend line is established and from which support and resistance are hard to break. You get to the bottom of the wedge and you turn up. You get to the top of the wedge and you turn down. The wedge has no choice but to snap at some point as it's getting tighter and tighter. Higher lows and lower highs. When it breaks the move it will be directional. It'll likely be a hard and fast move. If it breaks down, which I believe is more likely, it may feel flash crash, like for a moment or two. The selling can get nasty as you'll have a classic long squeeze going on. If it broke out it won't last long.

That's because any breakout to the up side will be met with massive negative divergences on both the weekly and daily charts. The breakout will fail so it's almost as if over time the market will have no choice but to break lower, although the timing of it can be very difficult. There is the tiny chance that we will be range-bound for quite some time in order to work off those nasty negative divergences on the weekly charts. But again, that's a very remote possibility. So the wedge is all we need to focus on. 1315 is the big level for the bulls to focus on, for if that goes, good bye market for a month or two. That would be good news bigger picture, but it won't feel good if you are loaded up long.

The short-term problem for this market is that it's losing more and more stocks to breakdowns below their critical 50-day exponential moving averages. Some broke and back tested and then collapsed. See Apple Inc. (AAPL) for that picture perfect back test of the lost 50's, and then boom, to the down side today. There are hundreds of those types of charts all over the market place. It's not just a sector, or two, but just about everywhere you look. With fewer and fewer stocks in up trends it adds up to a market acting more and more as if a breakdown is in the cards, and not too far into the future.

No leadership, and when the market has no leadership it's going to struggle more and more as the days go by. The biggest culprits these days seem to be the commodity stocks, and the financial stocks, although retail joined the crowd today in acting very poorly. The Goldman Sachs Group, Inc. (GS), a long time leader, is in a bear market. That stock is about as bad as it gets. The charts breaks down, then handles out, and then breaks down again as it did today. One peek at the chart will tell you what a bear market stock looks like. It has a 16 RSI on the daily chart and can't bounce.

Unusual, but in a bear market that's what can happen. Not a whole lot of stocks that are breaking here are close to being in a bear market, but Goldman Sachs is. Make sure you don't look to chase stocks in their own bear market just because they're very oversold. No bottoming stick there yet, and stocks that are printing bottoming sticks are not getting big lifts before falling again. Erosion is taking place quietly throughout this market. Shifting from bull to bear quietly.

If the market does break down it will accomplish two very necessary jobs for the bigger picture bull market. First of all, it will work off those very poor looking weekly index charts that have massive negative divergences with lofty oscillators that need to reset lower. Only when those negative divergences get worked off can this market move appreciably higher. In addition, the bears are still only at 19.6%, and though the spread has come down, it's been that the bulls have gone neutral and not bearish. Would like to see those levels at 27-30%, not 19.6%. The longer the market struggles for up side action that's sustained, the greater the chance to see more bulls turn bearish.

For now we watch the market's action for deeper clues. Just remember that S&P 500 1315 is the line in the sand for the bulls. If we lose that level with some force, we should see a very powerful move lower.

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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