Stock Market Establishing A Range?...Froth Destroyed....

Stock-Markets / Stock Markets 2011 Oct 20, 2011 - 03:49 AM GMT

The market has made a run from S&P 500 1074 on an intraday basis all the way up to 1233. An incredible move. No one is unhappy about this move who played the long side today. The short side got hit hard, especially the crowded trade down at those lows. Loads of shorts just coming into the short side thinking at the lows. That's about par for the course in this emotional game. After such a strong move, and especially since the move has taken us up to key resistance at 1235, it would be very normal for the market to calm down for a while and trade in a range. That range looks to be setting up between the 20-day exponential moving average near 1180 and the 200-day exponential moving average at 1235. That's 45-point range, or just about 4%.

This is key for the bulls. They have made a nice strong journey up off the lows, but have done nothing in terms of creating doubt about whether we're still in a bear market. The bulls would have to blow through the triple bottom breakdown at 1260 to start thinking they've done anything truly worthwhile. If the bulls can keep the market calm for a week, or longer, and hold above 1180, or at least close to that level, they can feel better about making another attempt at removing 1235, which would then open the door to challenging 1260. It looked like a slam dunk yesterday as the market was racing up, hitting 1233. That's when the bears reminded us of how tough a market this truly is. We closed today at 1209. They got the job done for the short-term, which again, seems to be setting up the range between the 20- and-200 day exponential moving averages. If the bears can forcefully remove 1280, they will have taken a step towards moving the market down a full support levels further. So, for now, the market seems tired, and it would be natural to see a period of basing within those two key moving averages. Now we'll see if the bulls have what it takes to keep things from falling apart.

Why would anyone question whether the bulls can hold the line here while we unwind? Simple really. We're losing our highly weighted leaders during this earnings season. Two days ago we lost International Business Machines Corp. (IBM). The leader of leaders in the Dow. That's a monster stock that has raced higher and led the way up. It disappointed on their earnings report and was crushed lower. The gap down and follow-through today putting it in not-so-great shape technically. The volume confirmed the drop. Not good news for the bulls. However, the market hung in well and moved higher without it. Today, however, we lost Apple Inc. (AAPL) from a technical perspective. A massive gap down on volume that tried to recover but failed miserably. That's two down.

Today the Nasdaq couldn't recover and underperformed all day in a very big way. Not good. Tonight we lost heavily weighted Nasdaq stock eBay Inc. (EBAY) as they, too, disappointed on their report. Down roughly 5% after hours. If this holds tomorrow it, too, will have suffered tremendous technical damage, which will be confirmed by volume. Again, not good. Give the market credit for trying to hang in there with IBM's bad news but, it's getting harder and harder to do so as we lose more and more leaders on their earnings report. This doesn't exactly bode well for higher market prices. The best we can hope for is for the market to hang tough while these stocks find their bottoms down the road. The key here is that none of those three stocks are froth stocks. All low P/E stocks and leaders. It's troubling.

I just spoke about non-froth stocks getting hammered on their earnings reports. Let's now look at stocks getting hammered without having earnings reports yet. There are numerous froth stocks out there not worth close to what they trade for. Froth, if you will. Pure froth. These stocks are getting smoked in a big way. Amazon.com Inc. (AMZN), Green Mountain Coffee Roasters Inc. (GMCR), Priceline.com Incorporated (PCLN), Baidu, Inc. (BIDU), just to name a very few of them. Scores of them from all over the stock market world.

Some of these have a strong weighting as well as those non-frothy stocks I mentioned. Add onto the amount of stocks we're losing as leaders. Those froth stocks are wonderful in as bull market, but I don't believe we are in a bull market, thus, you should be avoiding them at all costs. As the market has climbed, these stocks have been crushed. They're breaking down all over. So, when adding up the froth stocks getting hit hard, along with major non -froth leaders getting hit hard, it's tough to imagine the market breaking out unless we can somehow hold the line here until they find bottoms. It's possible, but whether we do or don't hold, avoid those froth stocks with ridiculous P/E's.

Sentiment is still on the side of the bulls. The new numbers out today, as of the close last week, showed the bears are still overpowering the bulls. An inverted spread of 5.4%, or the fifth consecutive week that the number has been inverted. We're coming off two straight weeks of negative double-digit readings, but -5.4% is still a nice inverted number for the bulls, and thus, the market is likely to at least try to hang in there for a while longer. I would think we'd still need more optimism for this market to finally start another strong leg to the down side, but I guess you never know. Normally that's how it would be. A recession becoming a reality in this country, or a major default in Europe, will make sentiment a moot point. The market will get annihilated if either of things occur. It has worked very well over the past weeks. The bulls couldn't have asked for more, and with the reading still negative, the bulls have a shot at another move higher. But don't get too excited now that we're near 1235. The bulls still have their buffer if things don't get silly bad regarding news in the weeks ahead.

So, we take this day by day knowing things aren't good in the world. You have to be very nimble. You can't over trade. You take gains fast and sometimes get out flat if need be. Not a time to play hero. Stay away from high P/E stocks and simply out, keep things appropriate so you don't get your head handed to you. Nothing bad for now, but the market is losing more leaders for the short-term, thus, nothing is likely to be easy for the bulls from 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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