Stock Market Looks For More Down Side, Rimm Slaughtered On Earnings

Stock-Markets / Stock Index Trading Sep 25, 2009 - 02:42 AM GMT

We had a nice one day plus pullback from yesterday's highs. 200 Dow points from high to low. Nice selling when we suddenly ran into the 20-day exponential moving average on the S&P 500 at 1043 (1045 low today).

We bounced up from there to close off the lows but the market followed through from yesterday's down move late in the day to close below that enormous 1060 to 1080 S&P 500 gap. It ended up being too tough for the bulls and that had to be expected on the first try.

A weak advance-decline line was the theme for the day and that has to be respected short term.There is one missing ingredient for the bears, however, and that's a gap down which I thought would take place today but didn't. If the market can gap down tomorrow, this puts the near term definitively on the side of the bears. Without a gap they can't claim much. A start for sure but only a gap down of some significance can give them the bravado they'll need to take this market down to and through the 20-day exponential moving averages. That's 1043 S&P 500 and 2079 Nasdaq.

If those numbers get taken out, we are looking at much deeper selling, possibly all the way down to the 50-day exponential moving averages although there is support above that level. The 50-day is at 2006 on the Nasdaq but we have the longer-term support line off the march lows at 2040/2045 and rising slightly each day. If that gets taken out, the bull run is likely a memory.

Losing a seven month support line would likely be the kiss of death for the bulls so that level needs to be watched very carefully. Technicians will tell you, and rightly so, that only if we lose the 50-day exponential moving averages is the up trend truly over and as one, I can't disagree. However, in my world, losing the support line off the March lows would be very telling. We did close off the lows today but after hours Research in Motion Limited (RIMM) is getting annihilated on earnings and this will likely be the catalyst to gap this market down, but of course, you never know.

RIMM down roughly eight points should get the attention of bulls and bears alike. The earnings season here is likely to be the catalyst to get a much deeper correction going. RIMM was fine but there's a lot of froth built in to these stocks so even strong earnings are being sold. Imagine if you miss! October's earnings could be nasty for this market. It's likely we've seen a top for a while at least folks. When a stock like RIMM gets crushed, and they're awesome normally, this is going to be a very tough earnings season would be my guess.

The daily charts have started unwinding, but remember that the daily and weekly charts got very overbought for a very long time at the same time and that's not usually a good thing. It's just so wound up it doesn't take much in terms of bad news to get the markets moving lower.

Stochastic's are still high and divergences aren't great. The market needs a period of selling folks. It may not be the end of the world selling, but it needs a while to breathe. Overall down trend should be the name of the game for a while, even if we never truly break down below critical support. Up side action, sustainable up side action, will be very difficult for the near to medium term. Be prepared for that. Bounces, if on weak internals, can now start to be shorted.

The dollar is showing positive divergences at the bottom of its channel on the daily chart. It moved up today and does show the characteristics of further up side in the days and weeks ahead. It's also very oversold and this combination will make it very tough for the bulls to gain any traction as the dollar continues its inverse action to the stock market. It won't be up every day but the look and action of the dollar goes hand in hand with the look of the overall technical picture just discussed. The dollar is signaling a short to medium term red flag for the stock market bulls.

Now listen carefully. We have enjoyed a fun market. It's been a good ride. If we gap down tomorrow and run, the market is in trouble. If we gap down and print a hollow candle that tells me things won't get that bad. With RIMM down 9$ after hours and with the futures smoked on the Nasdaq after hours, we may get that gap in the morning. What occurs from that gap down will speak volumes thus tomorrow is a major education day for us all. The best may very well have been seen. It may not have. Let's see what the gap gives, or doesn't.

Peace
Jack Steiman

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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