Stock Market Just Not Excited....Rocks Lower....

Stock-Markets / Stock Markets 2014 Oct 14, 2014 - 07:27 AM GMT

It's now one of those times when the market has decided it's time to unwind froth that has been built up over an eight-month period. When a market wants to unwind it finds a way to do so, but it's never going to be straight down. We are down approximately 6% off the top but a lot of it has been merciless selling without allowing the bulls to breathe. That's the best way to get those who are agnostic to turn bearish and for those who are bullish to turn at least agnostic. It removes the bullishness we've been seeing for too long. Ultimately we need to get more bears since we have seen a strong move down in bulls, but nothing even close to removing the bears. Coming in to last week the bears were still near historic lows.

They need to ramp, and I'm positive we'll see some of that when we get the new number on Wednesday. I'm sure we'll say goodbye to bears at 14%. In time near 30% would be fabulous. Get the bulls down to 30% or a bit higher and the bull market will be ready to rock much higher once again. Many times, after a long period of froth, you need to nearly invert the number, but it's quite likely we'll need that spread to get below 20%, if not below 15%. The bottom line is the lower the better for the health of the market. We have a long way to go, but be sure that we are well on our way. All the selling thus far isn't for nothing. It's the necessary medicine the bull market needs for one more, nice run higher before the bull market likely ends for several years. That's for another time.

When markets correct it's easy to think the market will never rally, but there are some terrific short-term rallies to come. No market goes straight down. That includes bear markets. This isn't a bear market, but whether it is or isn't is irrelevant. We're playing with oversold, and, thus, rallies will occur. It's best to simply use the tricks of oscillators. The story never changes in terms of appropriateness. You really don't want to start shorting with RSI readings near 30, especially if it's below 30. You may also want to consider taking shorts off when you get down near 30 RSI.

RSI's can go to 10, so it's no guarantee it's the best strategy, but the rule of law is to not short at, or near, 30 RSI simply due to risk reward. Do what feels right to you, of course, but it's at these levels of RSI's that you get your snap back rallies. It may take 20 RSI, but you get the idea. Keep things appropriate no matter whether we're in a bull, bear, or corrective market. Simple laws to follow make trading easier on the soul. Take out the risk and relax is my thinking. Just keep in mind the normal rules of trading and you'll probably have an easier time with things here in the short to mid-term.

1928 on the S&P 500 is first important gap resistance that should stop any rally cold in its tracks at least on the first test. With oscillators getting oversold it's hard to imagine much more than 2% below critical 1900 support which is the 200-day exponential moving average. 1860, thus, seems like solid support, but there's no guarantee we don't keep blasting lower so don't count on anything. Just know areas where risk reward is best with tight stops so as to lose less than you normally would on a trade gone bad. 1950 is always there after 1928, but that seems like a dream for the bulls at the moment. You all need to recognize the market we're in and adjust accordingly.

Respect the game and it will respect you back. Don't incur too many unnecessary trade losses because you're impatient or bored. The environment is nasty. Adapt and you'll survive nicely for the next bull-leg to come once the correction ends over time. That level can be well below 1800. Possibly even below 1700.

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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