Stock Market Reverses Down Off of Uptrend Channel

By: Jack_Steiman

The market has been on a move higher the past couple of weeks but with one major difference over the move up the previous weeks and months prior to that as was noted in last weeks report. Late last week the market started to print Doji Candlesticks, often a precursor to a change in trend move up against major trendline resistance which can be seen in our three index charts. The recent move up had become a grind. Like glass on a blackboard.

It wouldn't fall very much but the rise up was getting tired. Three days back we saw a move to 1080 on the S&P 500, which was the very top of that large volume and price October 2008 gap down. The thought amongst the masses was now we get rocking all over again because once 1080 is cleared, and their thinking is right, it's off to the races.

A funny thing happened to those plans. Massively overbought daily and weekly charts, with RSI's at 70 or higher, finally kicked in at the point of no return for the bears. The market had a huge reversal lower at the end of that day, closing just above SPX 1060 but not looking very healthy. It didn't take long for the SPX to lose the gap altogether.

Once lost, the selling accelerated some and now we find ourselves trading far below that 1060 gap and closer to the 20 day exponential moving averages across the board which is the first level of important support. Not close to the most critical levels of support to come but the first level of consequence nonetheless. You wouldn't expect a major break of these 20-day exponential moving averages right away, especially because we got so oversold on the 60-minute charts when we got there. This doesn't mean it won't be taken out some time soon. This move down also doesn't mean the market is toast longer term, although there are some real nasty red flags out there that I will be discussing later on in this report. After all, high volume reversals after grinding higher for weeks can mean things will be tough for quite some time overall.

So let's discuss some of those warning signs or red flags. We spent day after day when topping putting in tails off the highs meaning as we tried to break out further, selling came in just enough to keep the market from taking the next leg up. It wouldn't break lower with any force but day after day we saw tails meaning closing off the highs a sign of distribution. We saw, for the first time in quite some time, extreme levels of overbought, not just on the daily charts across the board, but on the weekly charts as well. That's not the best combination to have in place when thinking about breaking out.

The rubber band has to snap somewhere, and if the daily charts alone couldn't make that happen, then having the weekly charts join in sure made the journey that much more difficult for the bulls. Another red flag we started to see with regularity was negative divergences being put in not only on index daily charts but on many leading stock charts as well. At some point you figure those have to kick in. Add that in with what we saw above and that's not the best scenario for higher prices. Finally, a few days, we saw the 9-month base on oil break. We showed that chart in detail. It's a pretty long-term chart that finally broke down with enormous volume. Two times normal volume at that. There were enough red flags to keep things on the lighter side of playing. The market kept trying but this combination of events has finally taken the market down some. Nothing bad at this time but enough to take notice of.

Will it get worse? That's the big question. So let's discuss what is below current price in terms of important support and what is the most important support of all. Let's start with the S&P 500. The daily chart is the key chart to work off of. The 20-day exponential moving average is the first important level although it's not critical by any means. The market has moved back and forth through it, at least many stocks have so it's valuable but not the be all and end all of support. On the Dow the level is 9625. The SPX and Nasdaq have theirs at 1043 and 2083. Then it gets more interesting. The long-term, 7-month trendline off the March lows now comes in at about 2050 on the Nasdaq and 1000 on the SPX. Below that and the final line in the sand, we have the 50-day exponential moving averages at 9358, 2011 and 1009 on the Dow, Nasdaq and SPX respectively. As the trendline rises on the S&P 500 in the coming days, it'll meet that 50-day exponential moving average near 1009. So if you're asking yourselves where does the bull market really come to an end. Where does it really say it's over, it's only when we lose the trend lines off the March lows along with the 50 day exponential moving averages not far below that. When those 50's go away, so does the bull.

Sentiment Analysis:

There was little change this past week in terms of that although I bet that changes next week due to the selling we saw off the top these past few days. A 22.3% spread of more bulls to bears which is NOT extreme by any means. We'd have to double that basically to get this market too frothy on an overall level. In addition, even with the buying we saw, we never saw the put call ratio get complacent for any extended period of time thus there's no way the bears can make an argument that everyone is frothy about this market. Nothing complacent at this point in time folks. Let's term the sum of our sentiment indicators more or less neutral and they tend to be most valuable when at extremes.

Sector Watch:

Strong move lower in most Sectors this week mirroring our Indices. As we had highlighted last weekend most major Indices put in Doji's often a precurser to a change in trend and that played out this week in most of our key Groups. Oil led the move lower breaking down out of a 9-month basing pattern mid week as seen in our 4th chart below. We noted heavy pressure on all commodity groups with both gold and silver turning down hard during the week as well.

Many cyclical groups such as the railroad sector turned down hard off the top of our uptrend channel seen in our 5th chart below. The technology sector also turned down hard after an early week test of the top of our rising channels. The SOX/semiconductor chart can be viewed in our sixth posted chart. The late week warning by Research in Motion (RIMM) put some additional pressure on the group late week. If the market clears through our 20 MA's next week look for most groups to stay under pressure until we get to our rising support lines off the March low area where we expect strong support in terms of buying to come into play.

The Week Ahead:

We will have to keep our eye on critical levels of support. The daily charts are well into unwinding from very overbought and taking out some of those existing negative divergences. We could use a much deeper unwinding and if we can get the rsi's oversold enough across the index daily charts, we should see another attempted move higher in the channel to some degree. With the unwinding that has already taken place on the sixty minute charts and with good unwinding already on the daily charts, it's hard for me to imagine this market losing the trend lines off the March lows until at decent bounce occurs off that confluence of support. Again, that's 2050 on the Nasdaq. Anything can happen but that's my thinking for now. It all depends on how those oscillators impulse or not on any attempt back up. A lot to learn in the week ahead.

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.

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