Markets have a way of making everyone look bad or foolish. Just when you think one trend is firmly established, and there's no hope for the other side of the game, things turn. Euphoria can turn to despair and despair can turn to euphoria in the blink of an eye. Literally! When the market was pulling down hard, seemingly every day, the negativity could be felt everywhere by everyone. You could see it in people's faces and you could hear in their voices when confronting them on how things were going. The first thing they'd bring up is things look bad for me as my 401k, etc., is getting annihilated. They had a long look on their faces as if they just lost a dear one. People take the market seriously, and when it goes against them, they feel the pain. In the last two weeks the looks have changed as has the sense of well being. No longer in desperate straits they are now feeling a bit more euphoric, although cautious for sure.

Markets tend to do exactly what you think they won't, or can't, do right at the moment of maximum pain, or delight. Bulls have to learn tough life market lessons once they feel all is perfect. No different for the bears. In between is where it's tough in how does one play. Once it's directional it gets more emotional. We have seen two straight directional moves over the past ten weeks. Eight weeks pretty much straight down and now two weeks pretty much straight up. With today's closing prices across all the main index charts, the bulls have accomplished getting back through the 50-day exponential moving averages, and that's a positive for this market for sure. However, it's not an all clear signal. I'll discuss it further on in this letter. A good week for the bulls with emotions now brighter for them.

We finally saw the great laggards get a bid this week as the financial/bank stocks are finally rocking some. They are making important moving average breakouts even though they're lagging the overall market action. They have to start their move from somewhere, and at least they can say they have something brewing more positive technically, even if it's not warranted fundamentally at this point in time. There are many other places the money can run which would allow the markets to climb higher, but how much better would it be for the bulls if they can get these major heavyweights to stop lagging so badly. There is no guarantee that this week's action is the start of a longer-term move higher as the banks have made some decent moves before only to get smoked right back down. However, the technicals are good here on the charts, so they have a legitimate chance to finally get some real traction going. The market would more than welcome that.
Remember how a little over two months ago we had severe sentiment problems? They're gone. The bull-bear spread now only 12.9% after being as high as 41.6%. Also remember that we had severe negative divergences a little over two weeks ago on the weekly index charts, but those weekly divergences are no longer negative as the oscillators have been successfully worked off from the strong down move we endured. Two great enemies of the market have been eliminated.

Now it's all about upcoming earnings reports and economic reports. If they can strengthen up, the market is likely to remain in bull mode. If they collapse down, then we'll likely transition from bull to bear and finally lose S&P 500 1249. It really is all about the economy, and thus far, we've had a few small surprises in the past two days that are more positive in nature as the Chicago PMI, and the ISM manufacturing numbers, were slightly better than expected. If that trend can hold then we're in good shape. It's tenuous at best and must be watched closely. So far, not bad but we are not clear yet. Day by day these reports will tell the economic tale to come.

We are extremely overbought on the short-term 60-minute charts. At any moment we could see quite decently, thus, taking on new plays until we pull back some makes little sense, even though there are some very nice set-ups. It feels euphoric up here but RSI's are all in the 80's on the important index charts on the 60-minute charts. Things have a decent chance of setting up better again, but there are no great set-ups when the RSI's are above 80. Overbought can stay that way, but the risk reward is not very good, to put it mildly. Things are better for the bulls, but let things set up better on the short-term charts before taking on new plays.

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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