A Nasty Bear Market, Watch China's Shanghai Stock Market Index

Stock-Markets / Stocks Bear Market Jan 19, 2009 - 03:19 AM GMT

Best Financial Markets Analysis Article In every nasty bear market comes a point where you have to rally for a while. It does NOT mean the market is in good shape. It does NOT mean the ultimate bottom is in. Nothing is straight down. So is this market ready for some type of rally that can last a while and not just collapse right out? The title tonight says it all. The Shanghai market had been leading up but has now been in a wedge that is basing out. It looks ready to turn up and make the move and should this happen, it should lead our markets higher for a while to give everyone some needed relief. The chart is included in tonight's newsletter. If China rocks some we should go along for the ride and there's technical reasons for that as well.

The daily charts on all the major index charts are very oversold. Stochastic's still in the upper teens or near 20. The doji at the bottom of the channel on Thursday also says the buyers may have finally caught up to the sellers after a deep push down of 1100 Dow points. The market is set up to move higher. You also saw that today when we sold off hard after being up early. The Macd on those 60 minute charts didn't budge lower and started heading back north after the market bottomed. Very positive short term action. I'd say the overall evidence points to a near term only move to the up side. As long as 817 Sp holds there's hope for some relief for the intense selling we just witnessed. Let's hope so. We can all use it.

The financial's continue to absolutely stink and this of course is the bad news. The market will need at least some participation from these group if it has any chance at anything more sustained to the up side. The bears run as fast as they can to those stocks whenever they need to put pressure on the overall market. You have to start wondering what's really left. Most of the big names are about gone. We have now essentially lost Citigroup (NYSE: C) and Bank of America (NYSE: BAC). All that's left is JP Morgan (NYSE: JPM) and Wells Fargo (NYSE: WFC). They both got hit again today but there's really only so much left to annihilate. These stocks are deeply compressed at oversold and just a small bounce in these stocks is all the rest of the market will need to get rocking somewhat higher short term. The leader, Jpm put in a long tail off the bottom today the same way it did at the November lows. Again, being so oversold, it has a shot to rally, even if it's just a little bit but that's all the market would need. Keep an eye on those stocks as well early next week.

Something that gives the market a little hope near term is the way the indexes put in those long tails yesterday at the bottom of their wedges. The bears had the bulls dead in the water yesterday. The bulls were able to hold the wedge with a strong close. It's never etched in stone but when you get a long tail from well below a trend line that holds a wedge in tact it usually means the market is going to move higher in the not distant future. The bears recognize that they have run out of gas at critical support are likely to cover and less likely to take on new short positions giving the bulls some rope. They will usually let the oscillators unwind once this has taken place and being we're still oversold, it's likely we'll be able to hold the line for a while longer. It's important to understand the power of these wedges. They take a long time to set up nad thus when they break it's normal for them to continue that trend. Yesterday's break and recovery was a huge save for the bulls.

This would have taken the sp down to the next support area at 775 which is where you're playing with fire if you're bullish this market. It took a lot of energy to take these wedges from the top to the bottom. The top of the wedge is near 8900 on the Dow so there's room for some additional upside before the selling would likely kick back in. No guarantees and if the Shanghai decides not to make the move then it's unlikely we'll move up all that much if at all but it does seem to all be coming together for a rally here short term. Those wedges talk. Now let's see if the bulls can muster some upside energy.

The overall health of the stock market remains poor. We held above the November lows but that's not something to get very excited about. The overall trend remains down, even if we were to rally to the top of the wedge at 8900 on the Dow. No one can be certain about what's coming. There's only calculated guesses based on what's setting up. The daily Macd's have unwound a lot and they better get rocking higher (impulse) if we do indeed get this rally short term. If they fail to do so on a rally that would speak volume about where things are. it would not paint a pretty picture. if they do impulse then you can be more hopeful.

I think the most important thing is to be market agnostic in as much as no matter what you think will happen, be open to what may be setting up. It may go against what you believe is coming down the pike and you need to adjust your thinking to the message the market is sending. I do think this market is in deep trouble longer term. I hope I'm so wrong. I will remain open to all possibilities as things set up over the coming weeks. I hope we can get this short term rally just to alleviate the pain that most are suffering. I hope the Macd's on those daily charts impulse their brains out. I'm not counting on it. Let's just traverse the course as it all sets up. One day at a time. Let's see if the Shanghai can lead us up here for a while.

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.

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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