S&P 500 1105..Earnings....Resistance At 50's....Right Shoulder

By: Jack_Steiman

There are times when I think this would all be easier if I had you all in front of me and I could verbalize what I'm seeing and thinking. I'll do my best to explain today's action and what is ahead for this market. Today was an interesting day, for sure, because the bulls showed that they're not very anxious to give back that S&P 500 1105 support level, which, until a day ago, was a wall of China in terms of resistance. Two tests early on down to 1107, but that was the best the bears could muster up.

On the upside of things the 50-day exponential moving average capped things. 1120 being the level, and although it looked like we'd run through it, the bears said enough is enough for now. The reason being the 60-minute charts are wildly overbought, thus getting through such difficult resistance at overbought is asking a bit more than the bulls could give. After getting within a few points the market pulled back a bit in to the close.

A nice day overall, but we're still overbought on those 60-minute charts. Overbought suggests some selling is imminent but it should be very much. A good day for the bulls but nothing to get too excited about for now. Only a clear of S&P 500 1120 with force would offer up more upside before topping out.

So, now let's examine resistance and how tough it is here. There is lots of overhead on the S&P 500 to be sure. 1120 is the 50-day exponential moving average, and that is the place many right shoulders rise to only to die from there. Until the S&P 500 can clear this level you have to be on your guard. Sometimes we run through that 50-day exponential moving average and run up to the left shoulder highs, which is 1150. We saw that in January multiple times. 1120 to 1150 is extremely difficult resistance, and I wouldn't expect this market to move any higher than 1150 on this leg up in the market.

If we did get that high, 1150, it would put the daily charts at overbought as well and that would, at the very least, give us a strong selling episode in all likelihood. If we clear 1120, there is absolutely no guarantee we'll make it as high as 1150 anyway. We could stop anywhere in front of that, although a move over 1120 should get us to at least 1135, you'd think. Support remain at 1105 or the recent quad top down to 1197 where the 20-day exponential moving averages lives.

Let's talk about earnings. This is a MAJOR concern to me and here's why. We have had two important stocks report earnings over the past three days. Best Buy Co. Inc. (BBY) and FedEx Corporation (FDX). Two key economically sensitive stocks. The news has been terrible. Best Buy tanked on their report and followed through further to the downside today off a big gap down yesterday. Fedex lowered in a big way the bottom line possibilities for the year. The stock was down some during the day, but then something very disturbing occurred in the last hour. It just tanked out from -1 for the day to -4. Huge slaughter. Not what you see in a healthy environment.

Very concerning to see a leader such as Fedex to get hit like this. Not a great sign whatsoever. We're about to embark on the earnings season in earnest and it seems likely that many CEO's were way too optimistic on their future earnings when they reported things three months ago. May seems to have been a bad month for the economy on all levels from retail to housing. Are we about to have a massive number of disappointments? If yes, then look out below as stocks are priced for great results, not disappointing ones. We know that from the action in Best Buy and Fedex. Let's just say I wouldn't be going 1005 long in front of the upcoming earnings season.

Now for some very good news for the bulls. The sentiment figures are out and they show only a 4.45 spread from bulls to bears. Just six weeks ago we saw levels at 37.3%. What a dramatic change in sentiment in nearly two months. As I like to say over and over, greed is easy. Fear is tough. Fear causes a quicker reaction. People will run scared very fast when things look bad because of the bad experiences they've had over the past decade kin this market. Another move down in the market would cause an inverse relationship bulls to bears.

It's extremely difficult for the bears to gain any momentum to the down side when you have a nearly equal number of bears to bulls, or if we invert to more bears than bulls, and we're right there. 37.0% bulls to 32.6% bears, which is your 4.4% spread for now. Sentiment is clearly on the side of the bulls. One more leg down will cause the bears to be at a higher percentage than the bulls. That's excellent news for the bulls.

Bad action on earnings tells me there's no chance for a market breakout any time soon. Can we see 1150? Maybe, but don't count on it. We could stop right here just below 1120 but I do think there's a very decent chance we'd get through 1120 and try higher to make a more symmetrical right shoulder. Do not get overly aggressive on the long side please. Some exposure is appropriate. Full exposure is not. Day by day here folks.

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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