Stock Market Trending Toe To Toe...

Stock-Markets / Stock Markets 2011 May 26, 2011 - 03:07 AM GMT

It's a heavyweight battle between the bulls and the bears. No one is able to take the other one down. Each side lands a few good blows, but somehow neither one will go down. Solid chins on both sides. The bulls have held the line rather well when it looked like all was lost. The bears held things down when it looked like the bulls were ready to rock higher after the first small pullback roughly three weeks back. The trend has been lower over the past month, but the amount of losses incurred are rather small. Only about 4.5% as of the close of trading today. That losses have done their job in that the daily index charts have unwound quite a bit off of overbought. In fact, severely overbought, especially on the weekly charts which are also flashing negative divergences still.

That's the big headache we're still dealing with. More on that later. The daily charts have gone from stochastics near 100 to roughly 12. RSI's have gone 70 or higher down to the 45 area. MACD's have gone below the 0 line. No one would argue that this is quite a bit of unwinding that can only be thought of as bullish in nature. Now the RSI's are still well above 30, and that means there's no confirmation at oversold to match then stochastics, so we can still fall quite a ways lower if the bears could ever take out the wall of support at 1315 on the S&P 500.

The two heavyweights stand toe to toe with the onus being on the bears to change the trend in place. Personally, I would love to see it break down for a while to get those weekly charts unwound and to get things oversold on the RSI's on the daily charts. That would be nirvana for the bulls, but we'll just have to see who wins the short-term battle with resistance not too far above and support not too far below. More on that later as well.

Let's start by talking about sentiment. This is a very interesting topic here. Things are a bit out of whack for what we normally see, so let me explain. We had a very bad bull-bear spread five weeks ago with readings at 41.6%, more bulls than bears. Not good at all if you're a bull. The market has been pulling back ever so slowly since that time. Today saw something interesting that we would normally consider bullish, but when you look deeper, it's still a bit bearish. You can't say it's truly bearish when the spread is only 23.6% more bulls than bears. However, the bears are still only at 19.4%, or down 0.2 from last week even though we had selling.
The bulls are going from bullish to neutral but bearish. 19.4% bearish readings are not good, but with the spread only at 23.65 it's hard to get too upset. In a perfect world, more bulls would become bearish and rise the bearish percent to the upper 20's, or even low 30's from 19%. So yes, things have improved in the spread, but they haven't improved in terms of more bearishness. I'd still love to see that take place.

Let's focus now on those weekly MACD's across the board on those critical index charts. There is still a big headache there. The oscillators are still at very high levels. Not good. To make matters worse, they are flashing severe negative divergences on all oscillators with a big one on the MACD, my favorite oscillator to look at with regards to all divergences. There has been some unwinding for sure as all of the oscillators are off overbought highs. The problem is that they're still quite elevated and the negative divergences are still quite powerful in nature. If the divergences were small I'd feel better about them being worked off far more easily, but that's not the case at all.

The divergences are severe in nature. It's hard to imagine a stock market being able to blast off higher with such poor divergences. Can we rally some? You bet we can. The daily charts have done a lot of unwinding as I talked about above. However, the divergences are so nasty on the weekly charts I think the best we can see is a rally back up into the wedges, but not more than that for now. I truly believe the market is going to need a lot more time to work these divergences off before there can be a lot of sustainable upside action.

So, now a brief talk about resistance and support so we can try to figure out the markets short-term intentions. There is strong resistance above due to the large gap down from a few days back which took out the 50-day exponential moving averages. Gap and 50-day exponential moving averages not far above current price makes things very difficult for the bulls indeed. 1328 to 1336 on the S&P 500. Add in down trend lines off the recent top and the resistance just got tougher still. 1315 speaks for itself by now.

The bottom of the gap being 1312. 1315 is the headache with the bears trying multiple times to get through, but still no cigar. They have to blow through with force to get this market reeling down. So the lines are set up. 1315/1312 versus 1328/1336. Both sides are trying and failing, but we won't stay in such as tight range much longer. Whichever way it breaks should lead to a more directional move short-term. Just keep in mind that those weekly divergences are still likely to cap any break above S&P 500 1336 before it gets too bullish. Can run a bit, but don't expect a massive breakout. Not going to happen.

Day to day, folks. Nothing has changed really. Some hopeful signs for the bulls based on the daily index charts, and some leading stocks getting oversold, also on the daily charts. They may not offer more than a bounce before heading lower again. Your job is stay in loads of cash if not all cash for now. So much still to learn.

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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