Stock Market 200-Day Goes Away...Bears Get The Follow-Through Day

Stock-Markets / Stock Markets 2016 Jun 28, 2016 - 02:54 AM GMT

The bears have watched the exponential moving averages hold all pullbacks since the February lows of this year. No matter which moving average was on top, and which was on the bottom, the bottom moving average held each and every pullback, if it got that far. Most pullbacks contained by the first, and at the most, the second moving average off the top. Things got so bullish that the moving averages were aligned bullish as well with the 20's on the top, the 50's in the middle and the 200's on the bottom. Several weeks back the bears did attempt a move to that last moving average, or the 200-day, but it held very easily. We made our second attempt on the S&P 500 today, and it was lights out. The bulls didn't even put up a fight.

The bears made it look easy as the market gapped down and kept on going. No real effort to take it back, and as the morning wore on, it became clear there was no winning for the bulls on this particular day. They are used to winning, but Brexit has taken the advantage away short-term. Not even the feds endless, low-rate scenario could help this time around. A clear knockout for the bears on this day, and more importantly, a follow-through day to the down side, which is what they needed. Yes, Friday was nice, but without a follow-through you can't take too much out of one day down, even if it was a sever selling day. Not a problem today. The follow-through occurred, and the bears are now flexing their muscles with confidence. It's been quite a long time since the bears had a chance to feel good about anything. They have been waiting for some truth to finally play out and now it has happened. We shall see where it goes from here, but the removal of 2038, or the 200 day exponential moving average, confirms the weakness we've seen all year from the Nasdaq. Having all the key indexes below the 200's is a clear blow to the bulls. A day of celebration for the bears. Rare, but finally upon them.

While Friday was the big down day on the indexes, you never get excited unless you get a follow-through day and preferably the very next day. The other key is to see whether volume remains high or goes away and on that front the news is also good for the bears. There is no way we'll see the type of distribution day we saw Friday in terms of volume, but today was still a solid, volume day, which confirms the price movement down. Without the volume confirmation it puts things in a bit more doubt. Not terrible if volume wasn't high, but having high volume tells everyone that Friday's selling wasn't a fluke. That the big money was selling and continuing to do so. That's another feather in the cap of those bears. It doesn't mean we're definitely starting a new bear market but, it does tell us that a lot more has to be done in terms of playing safely. There is now reasonable doubt in terms of the bull market going forward. Distribution off the top with follow-through is a red flag for the bull market that has gone nowhere for nearly two years, but has shown no real bearish signs. Over time we'll need to see distribution again off another top to confirm this episode. Retail will buy stocks back in time, and when that rally dies and we sell, if the volume is once again high off the top and the volume on the buying light, it could mean and confirm the bull is over. We're a long way from that being a reality, but something to keep an eye on in the future.

There is one sector that we follow closely when understanding what's taking place in this type of market. We know the Nasdaq has lagged badly for nearly two years. Much of the buying has come in the Dow and S&P 500, or should I say, less of the selling. The banks have held their own and started to catch a solid bid once the fed told everyone a four rate hike year was in the cards. If the banks are leading up there's basically no way for any bear market to come around. Then things started to turn. A poor jobs report put additional rate hikes on hold which was followed up with a terrible durable goods report last week which put the final nail in the coffin of any hopes for a rate hike in 2016. The banks started to struggle, and then collapsed on the Brexit news. Banks collapsing is a deeper red flag that usual since again, the sector where most of them live, the S&P 500, was leading. Normally we worry about the Nasdaq since it must lead in a proper bull but with the S&P 500 leading all eyes were on the Sp. The banks are in free fall and yes, they'll bounce from oversold but they are overall leading lower in a big way and that's never good for the bullish case. Banks need to turn round, or things could get very ugly in a hurry. Not sure what's out there to help them other than the usual. The fed, and another QE does, etc. That said, they have little going for them right now.

One major difference between the past two days and what we've seen in the past two years is the degree of oversold we're seeing on the short term sixty-minute index charts. Across the board we saw mid to upper teen readings which is extremely rare in an ongoing bull market. If you get anywhere even near 30 you blast right back up. We stayed extremely oversold all day, and that is a major change in the trend that has exit for nearly seven years. Another red flag, if you will, to the bullish scenario slowly, but surely going away. We will bounce and bounce hard at times, but it's just getting down to the teens on the sixty-minute short-term charts is very telling about how things are shifting around to more bearish behavior. That's something to keep an eye on.

All that said, keep things very light. We are only a new bear market officially if we can make a triple bottom break down below S&P 500 1810. That's a long way away. One day at a time as usual.

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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