Stock Market Close To Breaking Down

Stock-Markets / Stock Markets 2011 Jun 16, 2011 - 02:55 AM GMT

Yesterday was promising for the bulls. We had a gap up near key support. Always good to see a gap up when you're so close to breaking down below key support. The gap up ran quite a ways higher before pulling back so late in the day. Overall, a good day for the bulls. Gave them some real hope that maybe things wouldn't get so bad. That maybe losing the 200-day exponential moving average wasn't a guarantee after all.

Then came the overnight period when the austerity package mandated by the Greek Government caused rioting in the streets. Asking the people already in financial trouble in that country to take it on the chin even further. Not what the people wanted to hear there, and thus, the rioting. Scary stuff watching that unfold on television. The futures sank some. Nothing all that bad but down some. Then came some economic reports that smoked the already vulnerable futures lower. A terrible Empire State Index report showing a positive economy in May turning into a negative economy in early June. A massive move lower in economic activity, which pretty much showed the State of New York to be in a recession

On top of that we had a hotter than expected core inflation number. Higher inflation with a rapidly weakening economy isn't good medicine for the stock market, and thus, the price it paid today. The futures opened lower with the selling accelerating throughout the day. We closed off the lows just a bit, but some real damage was done. The S&P 500 closed a couple of points above the 200-day exponential moving average, but the Nasdaq closed nearly half a percent below its 200-day exponential moving average.

The reversal today was important in that it was deeper in loses today than yesterday's nice gap up day. In addition, the gap up from yesterday was all taken back allowing for bears to remove that support just above larger key support. Makes it easier for them to fall below that support in the future. You want a gap to be out there if you're a bull as some form of protection but that protection is now gone. Ominous! Today was bearish for sure with the bears making headway towards removing the big mother load of support at S&P 500 1249. More on that later on in this letter.

The financials got crushed again today. The bear market in that sector of the stock market rages on day after day it seems. Very few bids. Only when things get very oversold does it seem to put in some type of a decent bounce, but it never really lasts very long. Let's face it, the worst financial outlook exists in the world of the banks as they are holding the largest debt. The fed pumping in money day after day, thanks to QE1 and QE2, has done nothing to keep these banks from falling apart as very few folks out there are using the dollars the fed is making available. Until there is news out there in the world that will boost these banks higher, they will continue to be in a bear market, likely for quite a long time to come.

After all, they're loaded with debt on their books, and not even the fed pumping away for a long time could help them. With that help going away for a while at least once June 30 comes and goes, the future isn't very bright for these stocks. Continue to avoid them would be my best advice. Without the banks, it'll be harder and harder for the market to hold up above critical support at 1249. Again, ominous!

The commodity world took it on the chin again today. That's understandable from the perspective of a non-accommodative fed once June 30th goes away. No more flows of cash means no more inflation, and once inflation calms down, it makes sense to think that the commodity stocks will be having a very difficult time with sustainable upside action. We saw that today in the world of oil which fell over $4.56 per barrel.

The deflation trade is on there as well as other areas of the commodity world. Copper and coal along with steel continue with heavy selling pressure. You have to ask yourself, what will come along short-term to make this trade change its stripes!? The commodity stocks got bubble-like over the past year based on the actions of the fed, and now they're reversing the trade as the fed pulls the plug on free cash. This is another area of the market I'd suggest avoiding for a while. Until the fed says he's willing to keep inflating again, this trade will probably struggle for much upside. Always bounces but the trend there is lower for now.

So what do we have to watch for with regards to the health, or lack of it, with this market. If we study the S&P 500 we know that the long-term up trend line off the March 2009 lows comes in at roughly 1250. We also know that the lows in this test down occurred at 1249. Together they sit and together they must defend this market. If we lose the 1249 low, and that massive long-term trend line at 1250 with some force, things could get very ugly for the stock market and fast. We could basically free fall for a while.

We are oversold, and that usually means a counter trend bounce is likely, but we had a bounce yesterday that was reversed back down today. There's no guarantee that oversold will hold this market up. You have to give the bulls their due with regards to what has happened in the past at key support levels when the market was oversold.

They normally get a bounce for a while that causes them to think the worst is over. I think that would be dangerous thinking if they do indeed get their bounce. That bounce may not come if we get a lot more in terms of bad economic reports and unrest in the European world. Things are tenuous at best for the bulls here. They are hanging on by a 1249 thread. Watch that level for more insight as to what is ahead for the future of this market.

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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