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Stock Market Gap Up And Late Reversal...Topping Stick Short-Term.....

Stock-Markets / Stock Markets 2010 Mar 26, 2010 - 03:15 AM GMT

By: Jack_Steiman

Stock-Markets

One way for a market to top short-term is to have a long run up overall over several weeks or months and then have a gap up to new highs that reverses during the day and closes below the open creating a black candle. This means an up day but on balance sellers after the gap up. In other words, exhaustion! It's never a guarantee to be the top but often signals as such and thus we have to respond to it when it prints which it clearly did today. It doesn't necessarily mean the end of the bull market. Not by any means.


It usually means the end of the near-term run up however. It is what it is, like it or not. Markets do get tired when they are very overbought and have had a great run up such as we've just seen. The bulls run out of fuel at some point and it's a good thing they do. You need to breathe and rest. Too much froth too fast is never a good thing for extending the bull market out a few more months. Today printed a candle that says no new longs for a while folks.

We started out with a big gap up. Let me set it up. Tuesday was a strong day with yesterday being a small down day, an inside day if you will. This set up a move higher today although it would have been best if today followed through to the down side. Bottom line is, we gapped up and ran, then we ran a little more, and then a little further still. All the while the daily charts were flashing small negative divergences on this latest grind higher in the market. The question to ask is when was this going to end!! How long could this last as, after all, it just keeps grinding higher. Sure, no explosion but a grind higher is still a grind higher and thus there was no appreciable unwinding of overbought oscillators.

Finally, with roughly two hours left in the day, the market started to fall. A big rush down but then, just as suddenly, another rush back up. It seemed all was safe when it finally gave it up altogether. The Nasdaq finishing eighteen points below the gap up open. Not good at all. A topping candle if ever I saw one but in a bull market, the move down shouldn't be too bad. However, you have to respect what's printed thus I would expect some down side over the coming days overall.

The PowerShares DB US Dollar Index Bullish (UUP) continued its upside hitting those commodity stocks hard today. The rest of the market wasn't so adversely affected but those commodity stocks took it on the chin. They fell one by one in just about all areas of the commodity world, and in many cases, quite hard indeed. Some are breaking down badly, losing their 50-day exponential moving averages. Whether they can reverse back up or not has to be looked at more closely in the days ahead. I wouldn't hold my breath. The financials finally gave up late as well, and they, too, helped carry the market down big time along with stocks like Baidu Inc. (BIDU) and Apple Inc. (AAPL), which had strong reversals off their intra-day highs. The UUP is telling us we should avoid the commodity world for at least the very short-term here.

The question I was often asked late day was whether this stick signals the end of the bull market. It could but not likely. The negative divergence printed at the top comes from a grinding overbought situation and not from your classic new highs off a huge sell off that shows a badly lagging MACD.

The MACD here was basically slowly deteriorating as the market grinded in to massively overbought conditions. The candle printed today does likely mean that we sill struggle for appreciable upside for some days, if not for some weeks. It will be important for all of you to show appropriate patience in the near-term as I will not FORCE new plays. If a market says to rest then we rest, and not argue with the commander at the helm. We adjust to the cards dealt and play appropriately. If you do force you will likely have a very tough time.

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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