Healthy Stock Market Selling Kicks In....

By: Jack_Steiman

There's good selling and there's bad selling. Selling that comes with a massive breakdown is never good if you're a bull. Not something you really ever want to see from a bull-market perspective. Then there's selling that comes which serves two very important purposes. Both from an unwinding standpoint. Look folks, the market stayed overbought, obnoxiously so, for a very, very long time. It just refused to sell very much. RSI's constantly in the 70 range, often well above with some RSI's reaching up near a ridiculous 90 on those froth stocks. Stochastic's staying near 100 with readings 90, and above, for a very long time. MACDs very highly compressed. No move down, just staying at the top for weeks and months. Add in how the bull-bear spread went from the teens to the red flag reading of 36.4%, and the market was pretty much full to say the least.

When it gets this obnoxiously full there is a price to pay for sure over time. The price is a correction. An annoying one in that it gives many head fakes to the upside but failing over and over again on each attempt. Sucks you in with new plays only to see those plays at first move higher, but then gradually and then steadily move lower. The market needed to rest. It needed to have stochastic's fall. It needed to have MACD's drop back and it really needed those RSI's to take somewhat of a prolonged vacation. That process is happening. We are also seeing bulls get agnostic and those who were agnostic get bearish. Week by week the process unfolds. A thing of beauty. Patience is the key.

Yesterday we saw the market test down to either the 50-dayexponential moving averages or key gaps on all the key index daily charts. We tested the 1625/1622 gap on the Sp. We tested the 3430 gap. Key stocks were testing those 50-dayaverages. When they were tested they were successfully held up by the bulls. It's fascinating in that we gapped up strongly on the indexes this morning after those saves yesterday. The problem today being those gap ups failed badly and the selling kicked in hard. We lost those gaps by days end and now the indexes are challenging key 50-dayexponential moving averages, 1611 on the S&P 500,. 3380 on the Nasdaq. If those go we test back to the old lows at 1598 on the S&P 500 level.

It would be no shock at all if we see those levels removed over time as the moving averages were moving up rapidly with market price gains, thus, it would only be about 5% down from the top where those levels would be broken and 5% is not much in terms of a correction at all. So we watch and learn what the market wants to do as we head down. 1575 is the huge breakout area. The market could breach this level, but we should be able to hold around that number. Time will tell, but today's action tells us this level could be getting a test before the selling is about done.

The selling over the past few days has been across the board for the most part. Far more than we had been seeing when the market found a way to hold itself up in the past weeks before the correction began. There's no rotation now as there was before. Banks are looking top heavy. Transports the same. Many froth stocks have some negative divergences, etc. There aren't as many places to hide your dollars if you insist on being in decently in this market to the long side. The advance-decline line has been steadily eroding over the past several days as we tested down towards these key gap levels showing again that there's not the usual amount of places to hide your cash.

This is a change of character not seen for some time and that's what happens when folks get more bearish. Fewer traders to come in and protect what was easily done before. This is how the market continues to unwind everything so it's really a positive for the bigger picture. That said, you always have to be open to other possibilities. It's always possible that the recent 1575 breakout all the way up to 1687 was a false one, and now things can come tumbling down due to poor economic fundamentals. I do not believe this is true, but you remain open and wait to see the proper bottoming process before entering in to new longs once again. I believe this is a normal pullback in a bigger picture bull market. Time will tell. Be patient here as things move along.

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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