Stock Market Getting Ready To Bounce

Stock-Markets / Stock Markets 2011 Jun 14, 2011 - 02:03 AM GMT

At least it should be. Without question the thing to watch for is a bottoming, which we did not get today, unfortunately, for the bulls. Looking for a gap down that prints a hollow red candle to tell me that an upside move is in the cards to unwind extremely oversold market conditions on the daily charts. It will probably be nothing more than a dead cat bounce, but a bounce is definitely in the cards to bring up those oscillators. It's easy to get caught up in the selling, and think that we'll stay oversold forever, but when you get down to major areas of support to be talked about later in this letter, it's time for that bounce as the bulls will defend at these critical levels across all the major index charts on the dailies. We're at 30 RSI on the daily charts pretty much across the board, and sub-10 on stochastic, not to mention RSI's at very low levels.

We've been oversold for some time now, so the odds are increasing greatly that we're close to a near-term bottom only. Not necessarily bigger picture, but definitely short-term. Not much to do with it as we'll likely only see 2-3% upside, but you can take on some small exposure to catch a few dollars but nothing more. The oversold does NOT tell you to get aggressively long by any means at all. It says to at least slow down if you've been short and possibly take on a small percentage of longs. One to a maximum of two plays, and it's best to take on slower moving, lower beta ETF's. Nothing with risk or froth or high beta associated with it. Keep it simple and appropriate.

The fed has now made it clear for the past several speeches that he is NOT intending to do QE3. Not good news if you're a lover of commodity stocks. They have indeed been leading this market lower over the past week or so since he's made that clear to the world. No matter where you look in commodity land, stock after stock is getting crushed, with SPDR Gold Shares (GLD) and iShares Silver Trust (SLV) now rolling over and leading the way along with ProShares UltraShort DJ-UBS Crude Oil (SCO) and DJ-UBS Copper TR Sub-Idx ETN (JJC) copper. Market Vectors Coal ETF (KOL) also slaughtered along with Market Vectors Steel ETF (SLX). It's really across the board.

If the fed continues with this removal of liquidity, you can then expect the market to be led down by those commodity stocks in the future. They won't come back strongly, except for the usual oversold bounces, unless he declares the next strong QE program. No liquidity for inflation equals bad behavior from the frothiest of froth stocks, the commodity stocks. Until you hear the fed announce the next round of help for the banks, stay away from inflation related plays. No other sector is more tied to inflation than the world of the commodity stocks.

It's also clear to most who observe the leading stocks of this market that many of them are trading at, or well below, their 200-day exponential moving averages. This has taken place after recently trading well above their 20-day exponential moving averages. The fall has been precipitous for sure. When you get leader after leader moving this low this fast it's yet another reason to start thinking about some type of bounce. On the other hand, the bigger picture message may be quite different. It may be telling us that deflation is around the corner in a much bigger way than we'd like to think or hope.

If that is the final answer to things in the future, it's quite likely we will be heading lower in the stock market for some time to come. Deflation is never good for the stock market short- to medium-term as we come off the top of the best of the economy had to offer. Things weren't bad but started to erode. The fed intervened and helped re-inflate the economy, but that is no longer working, thus, we may have to accept deflation as a primary part of our future for longer than we'd like to hope.

The major parts of our economy that would take the biggest hits with regards to things slowing down dramatically are really taking it on the chin after acting so well just two months back. Gaming or gambling stocks, which makes sense due to fewer and fewer people having the ability to just throw away money in gambling halls. The retail stocks have really taken a huge hit. Fewer and fewer consumers have extra cash to throw away on some outfits they may not necessarily need.

Folks are reigning it in with regards to throw away cash. More and more sectors are feeling the pain. Maybe the transports can hold up better, although business will slow down if the price of oil keeps plummeting. Many stocks from many areas are now in bear markets, especially from these areas. Trading well below their 200-day exponential moving averages. Lost these averages on large volume breaks showing institutional selling. The markets message is getting painfully more clear that things are slowing way quicker than we'd all like to hope.

S&P 500 1249 to 1262 is massive support, and only if this level is lost over time can the bears get excited about taking the market much lower. Like I said, we should hold there on the first try, but there's more evidence that things are eroding in our economy, which could translate into something bad for the stock market. We'll need more time to understand the markets full intentions over time. Again, just watch S&P 500 1249/1262.

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.

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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