Bad Week For Stocks Bulls....Back Testing Long-Term Breakout

Stock-Markets / Stock Markets 2013 Jun 23, 2013 - 05:21 AM GMT

This wasn't a great week for the stock-market bulls as a very nasty technical day occurred on Thursday with a big gap down that ran, causing huge losses across the board. The volume was also quite large on that selling. That's a confirmation that big money was letting go of some their holdings. Never great to see big money letting go. The big gap has now allowed the bears to get more aggressive on any attempt higher. That's what finally gives them some ammunition to feel stronger about their stance. They can come in and short on all attempts back towards the breakdown level of 1600 and 1612 respectively. They know that big money let it go at the top, and thus, they won't be running in to buy back at those levels. Like the Fed protecting the bulls before, there's protection now for the bears.

It was all good for the bulls thanks to the Fed for a while, and now the bears have that protection from a technical perspective. How fast things can change, but that's where we stand. You could see it today as the market tried higher quite a few times, but the bifurcation from the lagging Nasdaq just wouldn't allow for large gains elsewhere. Oversold didn't offer very much the way it has previously. The Dow was down 1.8%, the S&P 500 2.1%, the Nasdaq 1.9% and the transports were particularly bad losing 3.2%. Also it's never great to see a leader such as those transports leading lower. Bottom line is the market had a poor week technically allowing the bears to now have the upper hand for the short-term.

So what was the real catalyst for the selling? Actually, I should say what was the excuse that the market was looking for. The Fed decided to change their stance in terms of pulling in the free cash. They had offered up the need for the unemployment rate to come down to 6.5% before reigning it in. They changed that to 7.0% this week at the Fed gathering. Hard to know why he did that. Maybe he's afraid of too much for too long but it was a change. Just the elixir the market was looking for. The built in excuse put in to place and down we went. We had a winning week become a strong losing week right after those words spilled out of his mouth.

He had to know this would be the result so clearly he had no problem with creating a deeper pullback in the market. Remember folks, he is the stock market. Right or wrong, that's the reality of things. His monetary positioning is what the market trades off of. So yes, the Fed was to blame, but in reality, the market was going to correct more fiercely. The market gets a mindset and follows through. No news either was is going to affect it. We saw that with a very strong, surprisingly strong Philadelphia Fed report on Thursday. Huge upside shocker, and yet the market yawned and headed south is a hurry. With the catalyst here, the market looks as if it wants lower, even if we rally a bit early in the week to work off further oversold short term conditions.

The United States stock market seems to be playing catch up. The foreign markets, particularly the emerging markets, have been getting absolutely crushed. They are undeniably in a bear market. Indonesia, China, S. Africa, Brazil, Turkey and others are just getting crushed. If we were in that type of market we would be dealing with daily headlines across the media world. Many are wondering if we're the next country to finally feel that type of pain. That's always a possibility. You never want to say it's impossible but there are no real signs that this is what's about to occur, but surely I'll watch carefully to understand exactly what's taking place as we sell further. We simply got way too overbought on all time frames while sentiment shot up way too high with the spread at a dangerous 36.4%. It's not likely that we'd get that overbought on so many time frames for so long if we were about to enter a new bear market. That's not how things normally go. The market wouldn't allow for such gains and then just turn south in to a new bear. Anything is possible but it's not likely. For now the United States is simply going the process of deeper unwinding while also creating more pessimism which is exactly what it needs.

The market spent six years trying to break out over 1576, and then finally made the move. It shot all the way up to 1687 on an intraday basis. Now the correction is on. What was today's low? 1577. Perfect back test and then we rallied. So why don't I think the worst is over? Why wouldn't that be a simple back test and race higher? The answer is the volume on the selling with the large open gaps created. That's a sign that for a while, it's probable, although not definite, that we'll test back below this critical 1576 S&P 500 level. It's possible that we'll get another back test of 1576 and then blast back higher and that will need to be watched very carefully. I don't think that'll be the case. 1550, 1540 and 1520 are strong support levels. If we test down to 1520 that would be a full 10% correction and would be perfect in how it unwinds all time frames and bullishness. It's impossible to know how low we'll go but we watch the candle sticks along with oscillator action to gain insight as to where the bottom will be. Keep things light until we get the right bottoming process take hold.

Have a nice weekend.

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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