Stock Market Rally Time?...Should A Bit...

Stock-Markets / Stock Markets 2014 Aug 07, 2014 - 06:36 AM GMT

Markets can often get to the point where they need to stop selling after a strong move down. Oscillators take a beating. Many short- and mid-term charts get oversold, such as the Dow on the daily chart with a 30 RSI. It's time for a small rally. When I say small I mean small, since there's strong resistance at 1846 and 1854 on the S&P 500, which are the 50- and 20-day exponential moving averages. It does NOT have to rally to those levels, but it would make sense technically to get a move up to either one of those levels before heading lower again. Unwinding some oversold oscillators would be best for the bears. This is why it made sense for the market to rally once we had the strong gap down this morning. The Dow RSI was falling below 30, and some short-term oscillators were getting ridiculously oversold.

So with all of this in mind we should see, I should say, there should be a rally for the short-term, but I wouldn't hold my breath thinking it will be strong or sustainable. Maybe one to two percent and that would be it, and even that won't be easy by any means. I don't really think it's worth chasing this type of rally should it even occur thus waiting is still the best thing to do. Waiting on better opportunities to present themselves over time. In summation, while today was a nice reversal candle for the bulls for all the reasons I just touched on, I wouldn't get bullish here under any circumstances. The easy, bullish times are over for a while but not permanently.

The best part of this basically 4% pullback from high to low is how fast fear is ramping up. Just four weeks ago we had a reading of 46.4% on the bull-bear spread. Ugly number to say the least. Unsustainable long term, thus, the selling that has ensued. In just four weeks we're down to 33.4% or a 13% move down in bullish behavior. Exactly the medicine the bulls need, but it's not close to over. 33% on its own is still a terrible number. We will need to see low 20's, if not well down in the teens. This will depend on the depth of the correction and how much the Fed Yellen feels the need to get involved.

They can buy stock, or make silly promises about rates in a desperate attempt to keep the market higher, since, as you all know by now, that is her job. Keep the market up so the economy can flow. If we get a strong second wave down in time, and I suspect we will, the fear will ramp even faster as hopelessness will start to creep in faster and faster. You'll hear more and more talk about the end of the bull, with all other types of fear statements coming from seemingly everywhere. It'll be the end of everything soon. The bears will rock. The bulls will roll and the medicine will have done its job. This takes place over several weeks and likely months. For now, at least, the process has begun. A good start as well. It'll get better and better over time. The bulls can only hope.

Every trader wants to do one thing, and one thing only. Get very involved in the gambling casino that's open all day long, five days a week. It's always tempting you. Who can blame folks. It's fun to trade all the time. It's really fun when you have a strong trend in place, and can nail everything under the sun. Now comes along a time when trading is bad for your financial health. Folks can't control themselves far too often and create problems they need not do. Don't be one of those people battling the emotional game of over trading. There are times to be aggressive. There are times to be somewhat involved. And then there are times when almost all cash or even ALL cash is a strong and proper position. To me we are at a cash position place in the journey.

Do what feels right to you, but I really believe less is more for now. Appropriateness will help you when it's time to get back involved again. Too much trading here will probably result in bad returns. Be careful!

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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