Jack Steiman, www.SwingTradeOnline.com, on Downtrend Now Established
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You need to recognize a real change when it occurs. Once the bears were able to take out 1320/1315, or the critical trend line in play, it has been lights out for the bulls. It took three full attempts by the bears to get the job done, defending resistance over and over and pounding away at 1315/1320, but they finally got the job done. To that you say it's about time, and it's good for this market.
The change in the pattern came at the last top, which was the massive negative divergences on those index weekly charts. You put a 41.6% spread of more bulls to bears, and those combinations are where the top occurred. We've been slowly heading down the prior four weeks, and then last week, the fifth week in the down trend off the top, the selling accelerated. What was once easy for the bulls to accomplish is no longer easy at all. Too much time now below 1315/1320, and thus, you should not expect the market to be able to come back any time soon. The down trend is now established short-term. We'll discover in time just how long we can expect it to last. The longer the better, but for now, the market has made a turn from up to down in the trend.
What is still troubling from a sentiment point of view is how slow the move up in the bearish percent is. We've seen a decent drop in the bullish percent, but we have yet to see a real move higher in the number of bears. We need to see the bears soar above the current 20.4% level. A move up towards 30% would be best for the bulls if they want this market to try and move up appreciably once again. 20.4% means more bulls are turning neutral and those who were neutral are staying that way. We need to see folks start to hate this market and get totally bearish. That would be the best thing for the bigger-term bull market we're still in for now. As long as the bear number remains near 20% you can forget about another leg higher. Not going to happen. A few weeks below 1315/1320, I believe, will get the job done. Get those bears rocking and get that percent up to 30%. With last week's bad market action I'd have to think we're getting a higher number this week. We'll find out Wednesday if the market action of last week ramped a more bearish mentality.
What led us in to this bear trend is now leading once again after pausing for some weeks. Those horrific financial stocks are leading things lower again. Goldman Sachs (GS), JPMorgan Chase & Co. (JPM), Citigroup, Inc. (C) , Bank of America Corporation (BAC), American International Group, Inc. (AIG), and the list goes on. They cannot find a sustained bid. We even saw a downgrade Monday by a key financial analyst, something you rarely see since these stocks have lagged for such a long time. It's best to stay away from the weakest places in the stock market. Don't catch the falling knife. If you need to go long, about the last place you should be looking at are these financial stocks. The banks are full of bad loans and are being held up purely by the good graces of fed Bernanke. Without him we'd be seeing many defaults all over the place.
There is support at the 150-day exponential moving average at 1283. We hit 1284 on the lows Monday. Short-term charts are oversold. Daily charts are a bit oversold. We could see a small rally over the next few days of a percent or two, but don't expect more upside. The market is in a clear down trend with the wall of resistance at 1320. The 20-day and 50-day exponential moving averages are only 3 and 4 points away from 1320 as well. Not good for the bulls. This market is screaming for bullish behavior to be pulled in. Do not get caught up in small moves higher over the coming days. Unless we blow through 1320, the overall trend is down and I don't think we're getting through 1320 any time soon on the S&P 500. Cash is a wonderful position for the time being.
Jack Steiman is author of SwingTradeOnline, a journal of his market analysis and stock trading alerts. Jack had 94 winning trades out of 145 in 2010 (171% total return) -- and is 38 for 64 so far in 2011. He now provides
