Stock Market Ready For The Breakdown...

By: Jack_Steiman

The wedges are hanging on by a hair. Horrific late action tells us the likelihood is for a break down out of those wedges we've been showing you and moving back towards a retest of the old lows over time with bounces along the way. Some have already broken and some are about to. You'll see that on the charts sent with this newsletter. It looks bad folks. I guess the hope for the bulls is that we'll get another successful retest of those lows. The divergences on a move down lower will put in positive divergences but any bounce better be good or we're headed for something we all don't want to think about.

Nikkei on deck!! Nothing is etched in stone and anything can happen under the new President but unless something unexpected happens or unless things aren't as bad as they seem to be, and don't count on that, we could be headed for a secular bear market in the Dow and Sp which would then put the three major indexes in one together. The Nas has been in a secular bear for 9 years come March 10th of 2009. It really does look like the Dow and Sp are about to join the party. If that's to be avoided something really special needs to happen very soon and out of left field. All the stimulus package proposals and bail outs have done nothing to keep this bear from moving forward.

The global recession/depression that is upon us is simply not allowing the markets to gain any real traction.With the news we're getting just about every day and from multiple sources, it sure does seem possible that a global depression and not a recession is upon us although few if any are willing to admit it. It doesn't make for good press and hey, we're all about the truth, aren't we!!!! Better to be prepared than fooled but that's not the case here. We keep being told that the housing situation is only a few months to a few quarters away from resuming their upward spike. Forget it. Not happening.

When these bubbles burst, it can take years to decades before things get better. All you have to do is look at the Nas after its bubble burst nine years ago. Down 70+ percent and going nowhere. The commodity world isn't going to go back to where it was before its bubble burst. The housing market has a very long way to go before things start to improve. Oil is not going to go flying back up as all the big shots predicted like T Boone Pickins. When it was 100 he said 150 again. When it was 75 he said 100 and now 30's. Forget it. The bubble has burst and again, once they do, say goodbye for decades if not forever. Reality is setting in as the market tells us it is. The market knows. All I can say is 775 Sp better hold over time.

Listen folks, I don't want to sit here and glom and doom an already serious and delicate situation for most of us. The world is struggling and many people we all know are having a very rough time. Some of us individually know what I'm talking about. There is no magic elixir here. Greenspan started the whole problem but the lack of wisdom and control along with terrible greed by the banks and lending institutions created the ultimate monster. We are now suffering the consequences. The candy store was left unattended. Folks couldn't control themselves because their desires were too strong. Get me that home and anything at any cost. Figure out a loan. Figure out a way. Any way at all. The banks did just that. The lending institutions did just that. The cost of this is something we all haven't seen in our lifetimes. Now foreclosures are out of control. Banks won't lend. Housing is dead and jobs are being lost at an incredible pace. Let's deal with what is for as long as it is.

We need to be prepared to deal with what the market may have in store for us. If somehow it doesn't become another Nikkei we can also exhale and say thanks. However, it has a real shot of doing so and we must be prepared for all possibilities, even the worst possible ones. That's how you save your dollars. That's how you have winning records in record down years. You deal with the truth. You know the levels that say something bad is happening and you adjust accordingly. It's all about 775 Sp. Yes, we saw 741 and I guess one could say that's the ultimate line in the sand but that 775 support level is still critical and must hold on all future selling if this market is to have a chance at something good. Let's deal with the truth and not spend one moment in denial. It's how we'll all get through this together.

Short term there are definite positive divergences on the 30 minute charts. Will it matter? Let's hope so. They are there for everyone to see. The 60's do not have any positive divergences and i wish they did but at least the 30's do and should provide at least some attempt for a rally early on next week. We can't count on it because bear market have a way of making the very best of set ups look like the very worst in short order. We can only watch and see if we can get that bounce. And we better get it because the Sp closed just three points from the big breakdown level. 890 was that close and 888 is the line in the sand. 887 and below and we're in trouble. Deep trouble.

A huge confluence of support is right here. 895 the 20 day. 890 the trend line and 888 the 50 day sma. Massive support thus if we lose 888 the bulls are going to give up and the bears are going to get far more aggressive. The very line of defense before visiting 775 again is 860 where we have horizontal price support. Many times this level has held selling. If we lose 888 we see 860. If we lose 860 we see 775. Folks, you just don't want to see 775 again if you are a bull of any kind. If we get that positive divergence to kick in early next week and the bounce is labored, get ready is all I can say. I will be on top of this of course, that's if we even get the bounce.

There's a reason I question whether we'll get the bounce or not. many of those wedges we have been showing you broke on Friday in the last thirty minutes. Only the Nas is hanging on by a thread but the Russell small caps, the Sp and Dow all broke. When that happens off a rising wedge it usually spells very bad action to come near term. If we get the bounce but can only retest those breakdowns, look out below in time. The other hope for this market is those weekly charts which remain positive but who knows here. They haven't worked thus far. They've only afforded a weak bounce off the lows. It has been weak as most bear markets offer a full 50% move off the lows. This move hasn't come close to that. So maybe those weekly's and short term 30's can afford a bounce but it better be a strong one or lights out since most of those wedges already broke down on Friday.

The good internals during the rally have rolled right over and again this is classic bear market behavior when it says the rally off the bottom has gone far enough. They looked so good and were suggesting we'd see a deeper move off the bottom but now that doesn't look so good. The internals the past two trading days have been awful. Totally wiping out the good feel from the previous days. All of this is why we have refused to get overly aggressive during the past few days. We have done overall very well except the last two trades.

You can't get them all but really not bad and now we have to move to a much more defensive posture. We're hoping for that bounce first early this week but if doesn't take place, we'll move to cash and put on shorts after some failed back tests on both individual stocks and indexes. The banks rolled over and broke down on Friday and that's bad news. The real estate sector also broke badly and we have that chart for you in this report. Major sector charts took a bad hit on Friday so who knows how much of a bounce we can expect early next week.

Remember that chasing down on a breakdown is not the way to play shorts. The best way is to let them back test over time and unwind oversold conditions. Patience thus on any move lower if we don't short right away. There's always a reason for what we do. We are far from perfect but we know what we're doing as our record for 2008 attests thus just be patient. We're going to miss stuff. We're not going to play perfectly. We'll do the best we can and thus far it's been pretty darn good throughout this whole bear market of 16 months. It's no fun out there and we get it. Patience and acceptance are the only way to succeed.

By Jack Steiman

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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