Stock Market Breakout Doesn't Hold...

By: Jack_Steiman

When anything breaks out, whether it's a stock or a single index or the entire market, you need to get a follow-through with power. Not only that, when you break out, you need to power through on the day you actually do so. We broke out over 1985 on the S&P 500, but only by a little more than a point. It held the next day but only added one additional point. A red flag to be sure. Yesterday it all fell apart with a big gap down due mostly to two earnings reports. Visa Inc. (V) and Amazon.com Inc. (AMZN), one froth and one not froth, took it on the chin as both had warnings. AMZN on bigger than expected losses, and V on future growth due to a slowing global economy.

Hey, I thought our leaders keep telling us the global picture is improving. I guess the Government may be giving out some bad information. Anyway, when V warns about global growth you pay careful attention. Both stocks got smoked, and so did our markets. Nothing catastrophic, but enough to cause that breakout on the S&P 500 to go away with a gap down that never got filled. Not what you want to see of tops. We were ultimately able to close off the lows but the technical damage is in place. It will be very tough for the bulls to take back that gap since the market is full in terms of bulls to bears. More on that later on. A solid day for the bears who as usual need to follow-through here. They are not very good at doing that these past many months, but opportunity is once again knocking. The odds are increasing that they'll be able to follow-through, but you need to see it before responding to it.

The bull-bear spread got down to a hair below 40% for the first time in slightly over two months this past week. I am hopeful the start of the move lower is now upon us with Friday's bad market action. How badly does the market need to unwind? Let's just say it is imperative that we start the journey lower, and sooner than later is what needs to take place. The longer you stay severely spread on those bulls to bears the more technical trouble you're likely to encounter as time moves on. You can only pile in so many straws on that camel's back before it caves in and can no longer get up. Too many bulls to bears for a short period of time allows the animal to recover as time moves along. Too many bulls to bears for an overly extended period of time may kill the animal forever.

This is getting dangerous for the bull market. The extended amount of time we have seen this spread over 35%, and yes, over 40% is unheard of. It needs to get rocking lower and not in week or two, but now. The market, for its long term of health, needs a correction, and it needs it now. It doesn't have to be severe. It just needs to be bad enough to allow that spread to get under 30% in the coming weeks to a couple of months. Everything has limits. The bulls need to relax for a few months and let things journey lower to save themselves from losing the bull market altogether. Sentiment is the real problem for this market, not valuations. Valuations are always out of control in the stock market. Even in bear markets there's no reality. The real problem is froth and greed at unprecedented levels for far too long. Here's to hoping we get some selling to get that number to start dropping precipitously. The bull market is depending on it.

Of course we all know by now, that for the bears to gain full control of the markets they need all of the key-index charts to lose their 50-day exponential moving averages. They then need to rally back and test those lost averages on weak volume, and form tails down. Once that occurs you can kiss the market goodbye for some time to come. What a welcome relief that will be. Any selling between here and losing those 50's is meaningless noise. The bears need to eradicate those 50's on high volume with preferably a strong gap down. Once that occurs the bulls will flip to fear and the necessary medicine will be in place. While yesterday felt bad, and while it did cause technical damage, we've seen this script before. Do not get bearish until those 50's are in the rear view mirror after a back test. For now, some exposure is fine above the 50's, but avoiding froth stocks is best. It makes sense anyway. Of course, do whatever feels right to yo

Take things slow here. Maybe, just maybe, the bears can build on things.

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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