Strong Week For Stock Market Bulls...

Stock-Markets / Stock Markets 2011 Oct 29, 2011 - 02:24 AM GMT

Everyone who participates in the stock market knows this was a great week for the bulls as they accomplished something most thought impossible. That was to blow through S&P 500 1260, and to do it with strong internals, such as strong volume and a great advance-decline line. We got close to 1260 some days back and failed, but refused to fall to far below. After pulling back a few percent, the market tried again and succeeded in getting through 1260 S&P 500 this week, the level from which there was a triple-bottom breakdown some months back that led to a huge eleven-day fall of 19%.

The key to getting such a breakout is how the market reacts to that the next day and a few days after. You want to see the market get quiet and move laterally to slightly down. That's exactly what we saw today. The bulls should feel very good about that. It would not be bullish at all if S&P 500 1260 were to get taken back out to the down side right away. That level should now act as strong support, and in fact, should get back tested in time after the market tries a bit higher first after consolidating. It's a long road to getting more bullish with force, but that's the road map that would be best for the bulls.

This week set up the possibility of this happening, but you should off on your enthusiasm for now. We move along gradually if the market gives the right signals all the way through this needed process. This week proved to be a strong one for the bulls. The masses were short and have missed most, if not all, of this move off the lows. So, if you have been playing long and avoiding the short side, you should be feeling good about the action the last two days. Again, don't get carried away with that happiness as the market has yet to prove how powerful a breakout this is. We'll learn a lot more about that next week.

The financials are alive and kicking. Stocks like Citigroup (C) and Bank of America Corporation (BAC) made huge breakouts on great, confirming internals. Add in JPMorgan (JPM), Wells Fargo (WFC), Goldman Sachs (GS) and some of the other financials, and you have a love affair going on with the deadest of the dead stocks over the past many years. Seems like decades to most of us. It has been a very long time since the financial stocks have looked this good. The patterns have all turned, dare I say it, bullish. It hurts me to say it because it feels like it'll never last, thus, it hopefully will. These stocks haven't had a breakout with the right internals for many many years, and thus, you should respect it when it happens, whether it's deserved or not. Breakouts over many key exponential moving averages. Breakouts and run ups which are wonderful to see if you are hoping the market can hold on to the S&P 500 1260 breakout. Those stocks are mostly in the S&P 500, and thus, they'll need to perform if the market is going to move up towards the trend line resistance at 1320 S&P 500. Never a guarantee, but it makes no sense to argue with the markets message.

They aren't screaming short us. It's something many will do because they have been trained to do so as that trade has worked any time these stocks have tried a rally. The difference here is the nature of the move meaning those solid internals and the taking out of key moving averages. I am not suggesting that you get too involved, but that you would understand using weakness to actually get involved a bit. Good patterns with strong internals give these stocks hope they haven't had on their side for many years. The patterns are suggesting their lows are in, but only time will tell that tale.

The biggest headache for this market has been the worries over what may happen in Europe. The worry of not only one default coming out of Greece, but many defaults that would follow once the ball got rolling. The best minds have gotten together and have worked out a short- term solution. Not necessarily a great solution, and there is more work left to get things truly straightened out, but they took the first step, and the markets around the world celebrated. This is what allowed our markets to break out.

The news here at home hasn't been nearly as bad as the economic reports are coming in a bit better than most had expected. This was helping our markets here at home keep a bid. Once Europe got resolved, the markets around the world made their moves. We get another huge report next Tuesday as the critically important ISM manufacturing report comes out in the morning. A move decently above 50 would be great news for this market as it has been hanging around that level for three consecutive months. 50 is the line that tells us whether we're in contraction or expansion. A number below 50 will be very bad for this market, but a number decently above 50 will be great news. So, Tuesday is the big day for us to watch. If that number is good and Europe is not too bad, we can trend higher.

What's so interesting is how the bears are reacting to this day with regards to the market moving higher. If you look at the put-call readings on a daily basis, the number is constantly near 1.0, or higher, which shows a lot of pessimism and disbelief in this markets ability to move higher. Amazingly, the number was over 1.0 all day today. Shocking. The bulls like this. They want to see the bears rocking in. You would think we'd be seeing put-call reading down towards neutral at least near 0.70, but for now the bears keep rocking in, thinking the market is about to get smoked. Maybe they'll be right, but the patterns are not suggesting that for the short-term at least. Add in a lower VIX, meaning volatility is way down, and it's harder still to get a big move in the market these days.

Bottom line is we now follow the resistance and support levels closely now that S&P 500 1260 is gone. 1260 is support followed by 1243, and then 1235. Resistance at 1300 to 1320 where a trend line comes in. We take it day to day. Some long exposure makes sense.

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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