Stock Market Consolidating...

By: Jack_Steiman

It's important for markets to consolidate a strong move whether that move was higher or lower. When you get a quick move up such as we had, you get some very overbought short-term 60-minute oscillators. These short-term charts tend to being to unwind their oscillators fairly quickly once they get oversold or overbought. This last move up caused some very elevated MACD's, stochastics and RSI's. The inevitable move lower had to come and today we saw a drop of that take place late in the day. Nothing much to talk about although it should sell a bit more. Unwinding can take place with more of a lateral move.

It doesn't have to be a strong move lower and although you can never say never, I don't think we'll see anything too terribly hard to the down side as things unwind. The market has a bid now that the 20- and 50-day exponential moving averages have been taken back by the bulls. It's always more fun when things go straight up if you're long such as we are here. However, let me remind you that some selling is healthier than not because if you stay too overbought for too long, the move lower will be much harder and occur much more quickly without much warning at all. When you don't receive much warning the tendency is to react more emotionally which almost always results in a poor exit price. This is fine just the way it is and some additional lateral to down side action would be ideal.

We gapped up this morning but were simply too overbought thus we started to struggle with further upside action once the trading began. The sellers finally caught up to the buyers allowing for the market to sway between small gains and small looses throughout the day. The bears tried a few times to take things down with more force but every dip was bought. Late in the day, with about fifteen minutes to go, the bears took the market down to their intra day lows but that too was bought up right before the market posted its last trade. All the major indexes finished in the red but barely so. However, if you study those 60-minute charts, the bulls accomplished some good oscillator unwinding making today flat for equities but good for removing part of the overbought problem. It shouldn't be all of it but it was a nice start. Lower oscillator readings would be far more ideal for the bulls.

The banks and financials held up very well today, which was necessary for the bulls since many other key areas of the market did not hold up nearly as well, from technology stocks to commodity stocks along with a few other key areas. The market continues to find a way to move money around to hold things up instead of it flying out of the market completely. This has been a trend overall since the March 2009 lows. Every attempt to bring the markets down has found rotation except when we finally had our one correction. Everything in between has been one of rotation and not a mass exodus out of equities.

If we study the market carefully we see something interesting has taken place since this latest rally from below the 20- and 50-day exponential moving averages began. Instead of money flying in to the old guard leaders such as Apple (AAPL), Amazon.com (AMZN), Google (GOOG) and others, it has rotated out to stocks that under performed before that rally. These leaders were up on a high pole and need to rest thus their relative under performance over the last many weeks. The stocks that were killed and formed divergences at the bottom of their wedges have been bought up.

This is great behavior because if the market rally is led by the same old guard and the rest of the market doesn't participate nearly as well, the rally is doomed to fail. Here we see a nice catching up from stocks that didn't do so well when stocks like AAPL were up every single day no matter what type of market we were in. Again, solid behavior and thus suggests we should go higher again and when we do, it would not shock me if this process continues although you will see the Apple's of the world get involved again for sure, just maybe not as intensely as many are used to. They'll perform for sure but it'll be good to see the whole market join the party.

60-minute charts have seen RSI's go from the low to mid 70's down to the upper 50's on average. Stochastics have gone from near 100 down to the low 60 region. So far so good and yes, we could use deeper selling to unwind more but it's already starting to get a bit interesting. Stochastics in the 30's and 40's with RSI's near 50 would be even better for the bulls thus let's hope we can get there. You may not see the classic oversold that often comes with normal pullbacks due to the market having more of a bid again but I’d really welcome stochastics down below 20 and RSI's in the 30's. You can't count on that so you have to be ready soon for more plays. Impossible to time perfectly so we may enter a bit early but things are soon to set up again.

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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