China Cuts Interest Rates, Black Candles, Stock Market Top Longer Term?

By: Jack_Steiman

Futures were quiet early on in the evening last night. Out-of-the-blue the futures suddenly began a sharp, straight-up move. The culprit was more central bank stuff we're all used to by now. China decided to suddenly, and without warning, to cut interest rates by 40 bps. Europe saw their futures explode, and naturally, since we follow Germany overnight, we began to blast up. The futures rising steadily right in to the close. We gapped up and ran a bit higher. At the top today, we had daily RSI's on the key-index charts in the upper 70's. This is pretty much unsustainable. Add in all the froth prior to this explosion higher, and it seemed likely that the market would fade as the day moved along. That's exactly what happened. In this type of environment there is nothing more dangerous than chasing strength. Taking some exposure off isn't a bad idea at all.

China joined the GE party some weeks back, since they've been experiencing some worse-than-expected manufacturing reports. They are throwing out all the tricks now in a move towards desperation. Mr. Draghi, who controls the euro-zone, had refused to join Ms. Yellen in the QE party. Even he gave in some weeks back and reiterated it yesterday as well. Draghi, and the central bankers in China, realize that the way the United States has reacted to poor manufacturing reports had to be followed in order to save their economies.

As we all know by now, as 401K's go so goes the economy. Give people happy smiles when they get their quarterly 401K reports and they will, in turn, spend and support the economy. Desperate times require desperate measures, and we're now seeing the rest of the world get involved in the game of holding up their markets. The market and the economy go hand-in-hand, so we should see this continue for some time, until those disappointing reports on manufacturing turn around in a big way. So in the end, we saw the markets cool off after the morning highs, but the global game of free cash and low rates continues on unabated.

The question now, on everyone's mind, will be whether today's black candle is a sign that the long-term top is in. There's no exact science to it all. No one can know for sure but we can look at how and where it formed and come to a decision of some kind that makes sense. It may not be the right interpretation but we can analyze the candle and talk about it logically. We have had a long and powerful move up off the lows .These faded black candles come off a final gap up. The market exhausts itself. That said, it took nearly 80 RSI's on the daily-index charts to kill it to some degree. A period of unwinding is necessary with some price erosion.

It helps set things up for down the road moves to the up side. So, while today's black candle is normally a topping stick of some kind, it doesn't foretell a move of disaster for the bulls. It looks to me as if it'll be a pullback that unwinds rather than kills the upside trend in place. A few days or weeks off would be a good thing. Maybe the market will get slaughtered from here, but the way we fell as the day went along is not the behavior you see if the market was about to get hammered in the near future. We can't be sure about that, and again, some selling would be great, but I see nothing bearish from today's selling off the gap up open. A top longer term? Could be, but it's not what you see normally if that were the case.

Your job is to learn from here and keep it more light than normal. We will learn by the behavior of price to oscillators over the next few days or weeks. Patience is the key to survival and success in this game as you've all learned I'm sure by now. The inverse pattern is strong. There are multiple gap ups along the way that the bears will have a very tough time eradicating. Nothing will be easy for them. The bulls will fight at moving averages on short-term and long-term charts. They'll also fight mightily at those gaps. Getting too bearish may not be the right thing to do, even though we had some classic-topping candles today. A day at a time as we learn in the days ahead.

Have a nice weekend.

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.

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