Stock Market Bear Flag Continues...
Stock-Markets / Stock Markets 2011 Aug 27, 2011 - 02:52 AM GMTBy: Jack_Steiman
Try to understand why this may be taking place folks. The market had a tremendous move lower over only a two-week time period. Nearly 250 S&P 500 points in such a small amount of time. Markets only have so much energy from which to be able to make such a move before it needs a longer period of resting up. The bear flag (handle) is now three weeks old. It can get a lot older than that. I'll talk more about that later on in this letter. This extended period of time would allow folks to become more confused about what the market is about to do next. Within the bear flag there's a lot of whipsaw action. Totally understandable as the VIX is high, and folks who are confused are looking for other positions to act as protection. The whipsaw is dangerous to play from a trading perspective. The more you play the harder it'll be on up emotionally.
I'm not saying you can't play but don't play aggressively. There are longs and shorts from time to time setting up in this bear flag. As you've learned from the past, bear flags often give false signals along the way as to what's about to happen. Since it's a bear flag, many get sucked in once the market has a down day. Don't lose sight of how big this bear flag is. The top, for now, is at 1208, with the bottom, for now, at 1101. 107 S&P 500 points is no small flag. You can get knocked around very easily, so please, be aware of that reality and adjust your aggression accordingly. Many choose to completely ignore playing at all within the flag until a more directional move becomes obvious, or should I say, as obvious as humanly possible. Bottom line is today was the opposite of yesterday, which is perfectly normal within the confines of this, or any bear flag, and again, especially since this flag is so huge.
The market started out lower as the European markets were all down decently pre-market. The fed statement came out at 10 AM, and showed a fed ready to do whatever it can in the future, but that nothing was going to be forthcoming in the very near-term. The market didn't like that news, and thus, down she went. That is, until it reversed course to completely fool everyone as the market isn't ready yet for more sustained down side action. The European situation is in terrible shape with no one able to bail out Greece individually, and now each country asked to be involved is asking for collateral back from Greece. Collateral Greece simply doesn't have. This looks to end badly down the road. I don't see how that can end in a good way since the hero of the past, Germany, cannot do it anymore. They need help that others won't give into.
The market reversed hard and spent the rest of the day in the green in a way few thought possible. Ah yes, nothing like handles to blow everyone's thinking out of the water. Trying to play this is impossible and today was one of those most traders want to forget. When all was said and done, it was nothing from nothing. It closed in the bear flag at the close of action yesterday, and in the bear flag at the close of action today.
The bears do have a major headache to deal with here. The sentiment figures are not favoring a market collapse, although that's not impossible. Sentiment is not a primary indicator, and the numbers are not inverted yet. While the 7.6% spread is good for the bulls, the wrong type of news could annihilate this market, such as Greece going belly up, or a major bank doing the same. Greece is a real possibility, so keep that in the back of your minds. However, very short-term it won't be easy on the bears unless the right news hits that the market just can't handle. A 1.0 GDP today was below consensus of 1.3, but nothing so bad that the sentiment couldn't deal with. A major bank default, or Greece defaulting, is something that would crush this market, no matter how bearish sentiment is. Other than sentiment, however, the economy is showing continued weakness. That should cap upside near 1208 S&P 500, the last high. We can always breach above to some degree, but not by much, in my opinion. The economic news just won't allow for now.
Let's talk briefly about our great fed leader, Mr. Bernanke. Poor man doesn't know what to do with himself. Should I deploy QE3 now? Should I wait to see if the economy goes into a double dip recession? Even if it does, should I do it anyway? He really has very little ammunition to use to help the economy out. If he did folks, he would have already used it. So, don't buy into much of what he said today. He is basically out of tricks, and doesn't want to add to inflation, which is exactly what a QE3 program would do. It would bring more hardship to the average American citizen, and that's the last thing we need.
Can you say stagflation? A worsening economy with higher consumer prices? Let's not even go there. Deflation is a much better scenario. He pretty much told everyone today he's clueless as to what he should be doing next, but there's always QE3, and he'll be revisiting that possibly at the September meeting. Aren't we all looking forward to that? He now has the highest number fed members in history who don't agree with the head feds choice should he choose to do any QE program. Tells you how bad an idea it really is. Only time will tell us his plans.
We know 1208 is key on the S&P 500, and we also know 1101 is key on the S&P 500. Short closer to the top and go long closer to the bottom until one level is cleanly broken, which should cause more of a directional move. The market is very dangerous here. Don't lose sight of the fact that we're in a major down trend overall with loads of rebounds due to sentiment, oversold, etc. If we can get one more strong move down, this would create a triple bottom on the daily index charts AND allow the weekly charts to fire out sub 10 stochastics and 30 or lower RSI's. If that takes place with the right oscillators, it will offer a great buying opportunity. Peace and be safe this 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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