Stock Market Grinding

By: Jack_Steiman

The worst possible scenario is upon is for now. Grinding is not necessarily a precursor to a large move lower, which we know has to come to unwind froth. Grinding can last an incredibly long time and frustrate everyone. Markets are very good at that as we know all too well these past few months. We are grinding because we are full in terms of bulls, but we are seeing fear in the hearts of bears as shorting has not worked for them for quite some time. I guess you could say they're tired of being burned over and over again. Who can blame them. The bears need a bit of bravery to get the ball rolling down. Without any real bad news out there regarding our economy, and with the Fed Yellen reassuring everyone they're in control, thus, no worries needed, it's hard for the bears to find that bit of bravery they so sorely need.

Now, it is quite possible that the grinding is a precursor to the bigger selling to come, but as we all know by now, and yes it is boring, we need to see that large gap down that runs lower all day and closes at or near the lows. We then need a follow-through gap down within a few days to confirm the selling is here for a while to come. The news from Iraq couldn't get the ball rolling. That's not necessarily bullish. Grinding is waiting on a catalyst, but always keep in the back of your mind this one truth about severe froth. It does not need a catalyst. Under the pressure of a full market of bulls the market can collapse at any time. ANY TIME! There does not have to be a warning sign. So today was another day of grinding to frustration for the bears, while the bulls hold out hope we have another new high waiting out there. That could happen so don't front run as I always suggest. Do what feels right, but to be safest, you wait for the reversal candle, which is the large gap down that doesn't recover.

There are many different services out there and many large houses out there like Citigroup (C) that have ways of measuring the type of froth we're seeing. They all have one thing in common. They all confirm that the levels of greed and froth we're currently experiencing is not a common affair. It occurs once every 5-15 years, and when they have occurred at these levels in the past we've seen some amazing selling episodes kick in once things got rolling to the down side. None of the past experiences have been able to predict the moment the selling began, but these levels of froth and greed have never ended up positively for the bulls in time.

There was no choice but to unwind things over time and time is the key word. It's not over night. It's over a longer period of time. It takes quite some time just to get the bulls to turn agnostic, let alone bearish. It's usually at least a multi month process. So unless the way we have measured froth over time has changed out of the blue, most everyone agrees that, although you can't know when selling will kick in, the risk factor has jumped dramatically. That the odds are tremendously high that a very significant selling period will ensue shortly. That's all we can go by folks. Historical standards are all we have. There are simply too many reports out there that say by historical standards you need to be very careful about just how much long exposure you take on. Always do what feels right to you, of course, but please understand what you're up against.

No matter what price action takes place, there are only two levels that really matter for the bulls and bears alike. On the S&P 500 it's falling below 1897 with a bit of force on a closing basis. With regards to the Nasdaq, or the leading world of greed and froth, the level is 4204 or the top of the gap down to the bottom of the gap at 4186. So I'd say a close with a bit of force below 4186 sets the ball in motion for some deeper selling. If the S&P 500 is closing below 1897, at the same time the Nasdaq is closing below 4186, you need to be more than a little careful about how much long exposure you have.

Take it one day at a time and watch for that large gap down that runs lower all day. That'll be the first sign that things may be ready to change course. Day by day.

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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