Stock Market Exploring Possibilities....Sentiment...

By: Jack_Steiman

hroughout 2015 I felt the market was in a topping phase due to complacency along with massive, negative divergences on those key, monthly index charts. The market didn't fall much in 2015, but it refused to have sustainable upside action. In the end, the markets were down slightly for the year. It took all of 2015 for the market to finally stop its upward thrusts.

That's normal since the bulls had been trained to buy any and all pullbacks. They were sure to be rewarded, but with the bears fighting harder it took a little over a year to finally get the market from consistently moving higher. Then came the first trading days of 2016, and the slaughter was on. A very violent move lower in just a few weeks time The Nasdaq was down nearly 20% off its highs with the S&P 500 down about 14%. Some indexes officially reached what the market calls bear-market territory, while other sectors only reached corrective status. That said, most stocks it seemed were in bear markets. Many down well over 20 percent. Some well over 30 and even 40 percent.

The lower P/E, and higher dividend stocks, carried enough weighting in the S&P 500 and Dow to prevent those two indexes from falling in to bear-market territory. A few days back the market finally printed some daily, index-chart positive divergences. Some bigger than others. The CEO of JPMorgan Chase & Co. (JPM) bought shares (I think asked to by the fed) and the rally was on. The gap up came and we were off to the races, thus, our position in the Q's. A good play for sure. The move off the bottom did something different than at any time during the 2008 bear market. It has now printed three consecutive, large gap ups and go. It also did the last gap up today from very overbought sixty-minute conditions. Extremely unusual if we're in a bearish environment. Once overbought, the gaps should stop. It didn't. So now that has to be taken in to the equation as something you see in an environment that's turning more bullish. It has been an interesting ride, but maybe all it has really been was a correction to a bear depending on whether you're froth or not. Froth to a quick bear, while non froth to a correction. Time will tell.

So now let's go exploring the world of sentiment, which is critical to look at only at extremes. We spent nearly two years at extremes on the complacency side of the equation with the highest reading in the upper 40's, which eventually topped the market out. Anything over 30% is complacent, but we had at least ten readings over 40%. The complacency was absolutely off the charts. As the market began to go sideways the bulls began to lose faith. Upside seemed difficult at best. The market was no longer rewarding the buy pullback story that had been the friend of the bull for so long. Slowly, but very gradually, the market began to see the fruits of this frustration with the bull-bear spread getting smaller and smaller as the weeks wore on. This week we wake up to a negative reading of -13.3%. That is extreme fear. It can be a reading from which a market can bottom permanently. Doesn't have to be, but definitely can be so that has to be put in to the equation. So now we see three gap ups and go off a positive divergence and extremes of fear. Two for the bulls.

So what is there for the bears. Just about everything else from bank headaches globally to diminishing fundamentals both here and abroad. We have earnings on a major decline. Worst quarter in many, many years. The problems on the fundamental level seem to be worsening, not improving. Huge one for the bears. The biggest plus on the side of the bears but some very big pluses on the side of the bulls. I think we'll get our answer in the weeks to come. We closed today extremely overbought. A pullback will occur soon, and then another rally right back up which should form a negative divergence. Off of that eventual negative divergence we should get our answer. How this market sells off a sixty-minute negative divergence meaning how those oscillators respond to selling on the daily chart will tell me if the correction is over or not. I couldn't tell you for sure what to expect. We'll get the answer shown to us so be ready to adjust and adapt to whatever the message is. It's 50/50 to me. I can see us blasting out to new highs and I can see the reverse.

You don't have to know the answer. As it unfolds the oscillators will help us with the answer. Let them talk to us with an open mind. No preconceived notion of what should be. There are no should be's in this insane Disneyland of a game. Oh, and you can add low rates as being in favor of the bulls. They aren't going up much, if at all this year. They will stay very close to zero. A very interesting time is upon us. Let the story unfold in the coming weeks.

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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