Stock Market Bears Feeling The Pain...

By: Jack_Steiman

What else can you say if you've been taught to short the market just because of seasonality, and because you're told over and over just how things are out there. Playing seasonality is the worst thing you can do. Markets simply don't work that way all the time, or even close, really. Not only that, but even the worst month, September, is only down an average of about 1%. So many people look at the calendar and make their bets based on it. I just don't get it. If the market is on a sell signal then so be it. Doesn't matter if it's September, or February, or any other month. No different if there's a buy signal in place. Whatever message is sent out at any moment in time is all that should be thought about by traders.

The shorts seemed to think that September was going to be the month of the slaughter. Why do I say that? Easy! The bearish sentiment exploded just prior to September 1st. An inveRSIon of the bull-bear spread. We got to minus 8.3% more bears. Ouch!!! Just too many of them around, and thus, the major reason for this rally. The trade got heavy, and the bears are notorious for covering their plays rather quickly. September fooled them early on for sure. We need a bit more bullish thinking out there before we get any sustained selling. Always pullbacks to unwind overbought short and even longer-term charts, but until we ramp some bullish thinking it'll be tougher for the bears to get too much satisfaction.

The short-term charts are overbought. That doesn't mean the market just crashes out now. It would be great if we could get some selling here to unwind things, but it's easier to stay overbought than oversold no matter what time frame you use as a reference. Sometimes we see RSI's get to 80, or thereabouts, on those short-term 60-minute charts. It doesn't have to but that can be the case. Doesn't mean it will. We could start to sell immediately, and it should come as no shock if it does. It also shouldn't shock anyone if we try a bit higher first before things simply get too stretched and we sell a bit harder.

The longer-term daily charts are also getting overbought Stochastic's on the S&P 500 and Nasdaq daily charts are at 94 and 93 respectively. RSI's at 62 each. Once stochastic's get over 90, and RSI's over 60, you have to know some form of selling is coming shortly. RSI's may want to hit at, or near, 70 first, but with stochastic's so high, you know it's coming fairly soon. Add in those short-term charts, which are now basically overbought, and it tells you not to get too aggressive with new plays, although there are set-ups which can be played from time to time even in these conditions. We're on the look out for that.

The S&P 500 has broken through its trend line and through 1105/1110. The bears need to get active very soon, or these two levels are going to become rear view mirror stuff, and that's exactly what the bears don't want to see take place. Thus, some type of hit on the market makes sense soon. If the market can hang above 1110 for a while, it will allow the bulls to get braver still as they buy the dips and force the bears to cover all over again. It really is getting nasty for the bears although they have their friend at 1131 on their side. If we get there it would be a third try.

This is often the time markets make their move up and out, but because we're getting so overbought across the board, it may just be the catalyst to help the bears out for the short-term. If we can blast through 1131 in time, it would open the door to levels the bulls would be excited about with the majority of folks sitting around with their mouths wide open in disbelief. Not many thought anything good was coming let alone a move above 1131. I am not saying it's going to happen, but it would be more than interesting if it did as it would, as usual, catch the masses off guard. Maybe that's the point of it all. Catch those masses off guard. Time will tell.

The financials and semiconductors rocked today. This is the news the bulls have been waiting for as these sectors have been a massive headache to the markets up side. It has been trading in a range, the market has, for over three months because as the rest of the market acts well, these two sectors have become anchors for the bulls. The weight of their selling is too intense for the markets to make it through 1131 on the S&P 500 If they can continue to act better overall it would open the door to a clearing of S&P 500 1131. But that won't be easy. I promise you that. 1090 area remains strong support. Even 1105 can now be considered strong support first. Beyond 1131 the door is open to around 1150. Some exposure is appropriate here, but nothing aggressive so close to S&P 500 1131.

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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