Europe...Overbought Brings The Stock Market Lower...

Stock-Markets / Stock Markets 2011 Nov 01, 2011 - 04:57 AM GMT

That doesn't mean things have gone from good to bad all in one day for the bulls. In this type of market environment you have to be on your guard as things can change overnight. But that's not the case for the moment. Things did sell off decently today, but the Nasdaq wasn't all that bad, and from a points perspective, the Nasdaq has barely fallen off the top. I'm not saying today isn't some type of red flag as we closed not too far away from S&P 500 1260, the key level the bulls broke through to the up side just last week.

Falling back below would not be bullish action for the bulls, and we're precariously close, so you can't just hail the market is in perfect shape. It's far from it. It needs to be respected for what's possible here. It can turn south on the wrong news as quickly as it turned north on the sentiment trade off the 1101 S&P 500 double- bottom with a 1074 breach. The bulls are NOT in control here, even though things have improved quite a bit, as we all know. The S&P 500 would need to race all the way up to 1310/1320, and then back test 1260 successfully, for the bulls to claim victory. Any claim sooner than that reality is a big mistake, in my opinion.

Today opened the eyes of all the bulls. It was a nice day for the bears, but nothing technically bad to this point for the bulls. Just a warning shot to let the bulls know that things can turn down as fast as they turned up. They can turn down on the wrong news from Europe. Italy gave some warning signs this weekend, and that's why the down side action today. Europe is a real headache, so beware of all possibilities. Today gave that needed reminder to everyone.

We have our own problems here at home, but I don't think they are anywhere near as bad as to what they're dealing with in Europe. There is a major report awaiting us all tomorrow morning, thirty minutes into the trading day in the form of the ISM Manufacturing Report. The market wants to see the number start to pull away a bit from the neutral 50 level, which is the line between contraction and expansion. There's been three straight months at, basically, 50. I think a number of 52, or hopefully a bit higher, would be looked upon favorably by this market.

A number below 50 would be a devastating blow to the bulls. One they would probably not come from any time soon. If the S&P 500 is to hold above that critical support level of 1260, it will take a decent number from the ISM Manufacturing Report. A bad report and 1260 will become a distant memory for us all. Tomorrow is the most important report for our markets in nearly a month. Once that's over we can then refocus our energies on Europe. It would be good if we can put one in the win column for our own economy before having to deal with Europe.

Those darn financials were just looking so good, but today was a blow to their good vibe situation; Goldman Sachs (GS), Wells Fargo (WFC), Citigroup (C), Bank of America Corporation (BAC) and all the rest of them. That said, there was no technical damage done to the charts that make up this group of recent under performers. Sure, it looks bad to have a pretty nasty down day, but these stocks have run up quite a ways, and thus, no one should be shocked by the fact that they all pulled back as a team today. If you look at the chart of the Direxion Daily Financial Bull 3X Shares (FAS), it went from 9.00 plus to near 17.00 so clearly, it needed to sell some to alleviate some very overbought conditions on all time frames, especially the short-term time frames.

Some move lower is fine, but it should not lose 14.00, or it'll start losing more than we' like to see as things retrace. When something moves straight up you know it has to, at some point anyway, give back some of what it took on the up side, especially if that sector had been an under performer in the past. Folks are more likely to want to take some gains. It's only natural. A lot of what happens from here with these stocks will be tied into Europe and the economic report coming in tomorrow on manufacturing. We'll find out if the worst is indeed over for these multi-year laggards, or if the bad news is about to take over once again. The days ahead are critical to gaining the necessary insight. Stay tuned.

If we lose S&P 500 1260 with force, we look for support near 1243 down to 1235, and then really strong support once again near 1205 where we have the confluence of the 20- and 50-day exponential moving averages. It wouldn't be great to lose 1260 with force, but if we do we have to find out if the nearest support levels will provide the necessary comfort. If not, the bears will regain full control of the market. The top of the trend line comes in at 1320. If we can get that high it's likely we'll be able to say 1260 is strong support. Right now, because we haven't blown through 1260 for any length of time, 1260 is still support, even though we closed a drop below it, but it's not exactly super-firm support as our 1253 close tells us. Only if we had stayed above for a much longer time would I feel that way. Unfortunately, we haven't been able to race away for any extended period of time.

The market is on the precipice of a major breakout, and strangely enough, a large break back down. We learn a whole lot about the market intentions over the next few days. It will be more than interesting. Some exposure is fine. Too much exposure is not fine. Keep it appropriate.

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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