Stock Market Bear Flag Continues....

Stock-Markets / Stock Markets 2012 May 26, 2012 - 05:12 AM GMT

There is no question about the pattern in place across all the major daily index charts. Whether looking at the S&P 500, Dow, Nasdaq 100, small-cap stocks or large-cap stocks, you see the same pattern everywhere. There was an intense move lower in the market across the board, and after a while, the market got very oversold on all those daily charts. It was time for a pause in the down trend, with the natural course of things to back test the lost 20-day exponential moving averages. Using the S&P 500, that means a back test of 1343. It's been five days in the bear flag, and thus far, the S&P 500 has shown no inclination to even make that type of normal back test. It's just incredibly poor action, to say the least. It's still a possibility that it will happen, but ever so slowly and surely, we are unwinding those oversold oscillators without, basically, any price appreciation. That's never a good sign.

The market is simply hanging just a hair above the critical support level, which is the 200-day exponential moving average. On the S&P 500, that level is 1314. That's awfully close. We're right there. All it would take to lose this level would be a gap down on some bad news from Europe, and the next leg in the bear market is on. So far, we haven't seen the necessary breakdown, and it's important not to front run it. The market is hanging on by a thread here, and it could break lower at any moment. The bearish-bear flag pattern is in place. Now the bears need the break down below that holds and runs lower still.

Sentiment is starting to take hold here. The bull-bear spread is down to 11.7%. It didn't take long to get everyone on the dark side of the game. It won't take much more than another 500 to 1000 Dow points lower to get the number inverted with more bears ruling the day. When you get near zero or inverted, down-side action becomes far more difficult as the trade is becoming full to the bearish side. Even a bear market has moments where rallies occur, and they can be very powerful and intense. We're only likely to see this type of rally when things get so compressed to the dark said that the market has no other choice but to bounce back. We're still far away from that becoming a reality, but it won't take that long if the market keeps acting this way. It's impossible to time, but another leg down should take pessimism to levels the bulls will need in roughly a month's time. Again, there's no physical way to time it.

In the end, it's all about the 200-day exponential moving averages holding the market up, while the declining 20-day exponential moving average is massive resistance the market is having trouble getting to. It may never make it there, but there's still hope as long as we haven't lost those 20's. 2824 is the line in the sand for the Nasdaq 100, with 1314 the line in the sand for the S&P 500. Remember, you're not on breakdown just because you lose these levels by a few points. You need to see a powerful, forceful move below with volume. No volume makes the move very suspect. If you get confirming volume on the breakdown the next leg lower has commenced.

Have a wonderful weekend and enjoy life.

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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