Stock Market Strong Week...Friday Reversal?

Stock-Markets / Stock Markets 2011 Apr 02, 2011 - 05:49 AM GMT

This is the question we have to ask ourselves tonight. The market had a very nice week with today being the day we tested back up to resistance on both the S&P 500 and Nasdaq. The old high on the S&P 500 being 1344 with some resistance at 1332 first. We hit 1337 today right in the middle. The Nasdaq had strong horizontal resistance off a gap down at 2800 to 2808. We hit 2802 today on the highs. So in essence, both indexes hit their strong resistance levels today. The reason this is so important to look at is because we want to see what happened after resistance was hit.

The answer is, we reversed some with the S&P 500, Dow, and Nasdaq all printing black candles, meaning on balance sellers for the day after the gap up open. We gapped up, hit resistance, and then fell slowly throughout the day. Not great when there's a good run up and then hit resistance. Not terrible either. It's not a death sentence by any means, but it does suggest that we should see some attempt by the bears to sell things off a bit early on next week. Good news on the big Jobs Report was the reason for the gap up. Good news was important in terms of seeing what the market could do at these big resistance levels. Good news on the jobs front certainly offered the bulls an opportunity to clear those big levels of resistance. It didn't happen. They came close, but in the end, the bears were too strong to get through them. So, in the end it definitely was a nice week for the bulls. But now we should expect chop at best and some down side at worst due to those black candles at resistance. Nothing to run for the hills for. A breather if you will. A chance to unwind things. We'll know more Monday once we open up.

There is always something interesting to point to if you want to take an opposing view of what's taking place bigger picture. We all know the market looks fine overall. However, if you want to think more from a bearish perspective, all you have to do is look at those semiconductor stocks. The Semiconductor HOLDRs (SMH), or proxy for those stocks, really took a big hit late in the week and broke down below support. Big move down today on increasing volume through both its 20 and 50-day exponential moving averages.

Not good action by any means, especially since this sector has been leading on the most recent move up. It engulfed and broke support, which is just not normal action preceding a regular pullback. Usually it prints a Doji, or small black candle, such as we saw on the regular index charts today. Not this group, however. It's a red flag and keeps me on my toes as I try to understand the bigger picture message the market is trying to send.

This type of behavior, fortunately for the bulls, is not wide spread by any means. If it was I'd say we made an important top for sure for a very long time to come. It's more unclear now simply because the majority of sector charts are far more healthy. I won't worry about it too much, but I will be interested in watching how much of a follow-through takes place next week in this important economically sensitive area.

There is some life being shown by those pesky under performing financials. Nothing to get too excited about as the Direxion Daily Financial Bull 3X Shares (FAS), or aggressive proxy for this group, tried to break out today over 31.00 on a closing basis, but failed to complete that move at the end of the day. It was exciting there early on as it moved decently above this 31.00 level, but the end of the day took away the short-term hope that this area was about to rock higher. Maybe that will take place once this market calms down a bit off today's black candles. For now, we hold hope that it at least made some effort.

If the FAS can explode and hold over 31.00 on a closing basis, it would send the financial bears packing for a while as they would need to look for another partner to take down. They'd know without question that their days of controlling this area of the market are over for at least the short-term. If the market does chop around or fall a bit as I expect here, it will be critical to watch how much relative strength these stocks show. If they don't fall much while their oscillators hold up, watch out above. We'll know the answer sooner than later.

So now we know the market had the ability to complete those inverse head-and-shoulder patterns, which play out far more than their brother in harm, the head-and-shoulder's pattern. The reason being is that market go up far more than they go down. The SPX measures a bit over 1400 if it plays out over time, but how this market pulls back is key to learning about the odds of it happening. A right shoulder would be perfect here, thus, some selling would be fine. I want to see the SPX hold above 1290, and the NDX above 2700. If we fall below those levels the pattern is voided out. There's lots to watch and learn, and for now those are the key support levels to keep in mind.

For now we watch and learn and keep new plays at a minimum for now. Maybe the market will find a way to just keep blasting off upward and out, but those black candles across the board today suggests it won't be easy for too much upside in the very short-term. We will learn a lot next week, but for now keep it light.

Have a fun weekend and do something nice for someone because you can. Don't forget to inhale those kids as well.

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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