Stock Market Right Shoulder Bounce....

Stock-Markets / Stock Markets 2010 May 28, 2010 - 01:03 AM GMT

The one thing that prevented us from shorting the last few days although the action was poor overall, was the very oversold condition of the MACD's on all the major index charts. Just so far compressed down that the market needed to find a way to get those puppies back up. Suddenly, last night we got news from China that they will be backing the European banks for now and there you go. The news the market needed to unwind those oversold oscillators. Amazing how these pieces of news come out just when the market has to have it. Great stuff.

The futures exploded on this information over night and held as we approached the open. We gapped up and held the gains, although the bears made a few feeble attempts to bring things back down. Not going to happen for them today. The bulls took over and ran this market up slowly but surely all day. In that process of slowly moving higher we also saw the MACD's finally make a hook back up off the bottom that looks like they need further upside before this rally stops. This was the reason for the Standard & Poor's Depository Receipts (SPY) long today. At the close the market was at the highs as the shorts gave it up late. A good day for the bulls but nothing to get excited about at this point in time.

As the day went on one thing became clear that suggested things would stay up all day. The CurrencyShares Euro Trust (FXE), or the euro ETF, was printing new lows yesterday but doing so with strong positive divergences at the bottom of its MACD cycle. In addition, at the same time the FXE was printing new lows with a positive divergence, the PowerShares DB US Dollar Index Bullish (UUP), or the proxy for the dollar, was printing a negative divergence at new highs yesterday. With this suggestion of a pullback on the UUP and a rally on the FXE, it seemed safe to go long a bit.

In addition, there was one last catalyst that suggested higher short-term and that was the Volatility Index (VIX), which was just coming off very overbought conditions with its MACD crossing bearish down from very elevated levels. This confluence of events allowed the markets to close on its highs and should provide a bit more upside action overall in the very near-term.

We now have a double in place for the S&P 500 with the low of 1044 in February and the low set just a few days ago at 1040. Three months apart also suggests a bottom may be in place short-term. Exhaustion to get this market back down to the old lows. Four gap downs in the pattern with the fourth one the usual culprit to a bottom from exhaustion. This last gap right to S&P 500 1040. This scenario can give the bulls some hope that we've seen the worst of things, but that is by no means a guarantee. In fact, if we can rally to S&P 500 1120/1140 we will have a right shoulder in place from a strong head-and-shoulders set up.

That would set the market up to fall once again and from that fall we would have to watch how things unfold. The story is unwritten with a few possibilities. First one being a positive divergence on the way back down with intense pessimism ruling the market again setting up a strong blast higher. The other one being we make new lows on the MACD, and that would be market death for the bulls. Only time will tell that tale.

The 200-day exponential moving averages still have not been broken forcefully on all the major indexes at the same time. The SPX was below by 3%, but the Nasdaq hung in very well and with the Nasdaq the leader of the stock market, it will have to lose that 200-day exponential moving average with force before the bears can claim total victory. They've come oh so close many times intraday, but haven't gotten the job done to this point in time. Close doesn't count in this game.

They must get the Nasdaq well below the 200's at the close of a trading day and do so on big volume, and only then can the bears do a happy dance. The market is still unhealthy for now but the bulls still have hope over time that things can work out, but you don't play it that way. In the moment they are fighting for their lives. We are in one play and won't add much if anything. I don't expect this rally to last much longer, but the market needs a stronger right shoulder, so we should trend a bit higher overall for now. Don't go out there buying haphazardly because today felt so good. Go easy here.

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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