Stocks Rally Off Oversold 60's...

By: Jack_Steiman

Keep in mind, we're in a bull market, thus, it's not easy to keep the market down once the shorter time frame charts hit oversold conditions. In a bull market you rarely stay oversold for any length of time. It's 30 RSI, or close, and then another rally up, although it may not be a very strong one once the overall picture says some selling is warranted.

I can totally understand the frustration felt by the bears who just can't catch a break no matter how hard they try and no matter how much hope a given day gives them as such was the case last Friday. Bull market corrections just don't go down every day the same way a true sell signal does. Thus, the constant frustration from the bears, which helps keep the market afloat due to their frustration, meaning they cover their plays quickly due to fear of getting killed. Who can blame them. If that wasn't to be the case the emotion of getting hit again just doesn't sit well with them, and thus, they cover their shorts in a very short period of time. Honestly, as long as that's going on, there won't be any intense selling.

We closed off the highs, but it was a nice reversal up day for the bulls, who were fearful of losing those 20-day exponential moving averages for a second straight day on the Dow and S&P 500. They recovered back over. The Nasdaq failed to do so, and that's a bit of a red flag, but at least other critical major index charts recovered back over. If all three were to close below the 20-day exponential average for several consecutive days the market would be in trouble short-term. That's still very possible, so don't let your guard down here just because we came back some today. Remember, the Nasdaq was down nearly 70 points on Friday. Today doesn't bail the bulls out totally from a correction continuing. Truth is, the market could use more selling just to unwind things deeper, which would allow us to get very aggressive on new long plays.

So what does today tell us?

It's very hard to say, but when we look at the daily charts, they are fighting negative divergences. But sometimes intense bull markets can fight through them, or they keep going up to make equal highs, and form even more negative divergences before they're ready to just crater lower. The negative divergence is most pronounced on the Nasdaq. That's because the biggest froth was found there. So was today just a small upside day before much lower? Was it the first step to another top at 1302, or so? The next day or two will tell that tale. It could very well be that we get more upside based on first of the month buying. Very tough here, and taking on more than 20% exposure makes little sense whether you're a bull or a bear. Neither side can feel totally confident here. Neither should you.

Keep it light because the more you do as a bull, or a bear, the more you're likely to struggle. The bears had a great chance today to follow through on their successful day from Friday, but just didn't get the job done. The oversold 60-minute charts wouldn't allow. If things were about to really fall off a cliff, oversold would have stayed that way. Thus, it's best to keep it light here with diverging signals all over the place.

The bigger picture only needs to be understood from this perspective. As long as Fed Bernanke is printing those dollars the market is likely to remain in a bull market for years to come. It doesn't have to be fair, or appropriate, but the bears are likely to have a very hard time for the foreseeable future other than your usual corrections we're trying to start here. All corrections will be bought up, and then some, over time as long as those printing presses remain on. It's impossible to understand the long-term negative ramifications this will cause down the road, but Mr. Bernanke doesn't seem to care about that as we speak. His only concern is no double dip recession, and a bull market. It doesn't matter what the price tag will be, just so nothing bad happens on his watch. He's determined to make Wall Street the economy, and he's doing one fabulous job on that front, although, again, at a price to be paid in time. I guess he just figures he'll be gone when it's pay back time the same as Greenspan. Let things fall apart years from now. Just not now!

The S&P 500 needs to lose that 20-day exponential moving average with force at 1279 in order for the market to head down to great support from 1262 to 1252 where we have a gap, and the 50-day exponential day moving average. If the bears can ever take out 1252, then they can start focusing on a real deal, 10% correction down to 1175/1200. Until then, it's still a buy the dip mentality for everyone. This is a very difficult market due to the trend being inverse to how the charts look technically. Go VERY slow here folks.

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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