Wednesday, January 26, 2011

Market Holds Support...Bounces...: The difference between a bull market and a bear market is action such as you saw today

The difference between a bull market and a bear market is action such
as you saw today. The overall market holds up, while froth stocks
continue to mostly head lower and continue their correction off their
most recent tops. The market is bifurcated and that's never great
news. The Dow is well out performing while the Nasdaq is well under
performing. That's simply because the highest froth and P/E stocks
live in the Nasdaq. That won't be changing any time soon, thus, the
correction to the down side should remain mostly in technology. That
doesn't mean the overall market won't take a hit as well but the
biggest damage will be in the land of technology.

Lots of overall back and forth will be the way for a while longer
until the market can unwind deeply enough to attract more buyers. The
Nasdaq has unwound to the upper 50's on its RSI, but the Dow remains
very overbought. It would be best to get the Nasdaq near, or at
oversold, while the Dow at least pulls back to the 60's, or the 50's,
on its daily RSI. It won't be easy getting sustainable upside action
if the Dow remains so overbought. For now you try to find good bases
with lower P/E's, and be patient, meaning you may have to be in the
hole a bit on your plays, but over time, the best patterns that align
with lower P/E stocks should work out well over the next several

There are sector charts working their way towards support. Those
supports are either key exponential moving averages or gaps. Doji's,
or reversal candles, are taking shape at these areas of key support
suggesting the market is still finding rotation in to other areas of
the market instead of leaving the market when things sell off some.
Out of one sector at overbought with bad divergences in to sectors
printing bullish candles at those support levels.

This pattern has been in place for several months now and is showing
no sign of reversing that pattern. You always have to be on guard for
that reversal, but it has not shown up to this point in time. Never
try to guess that things will become something.

Right now there is no evidence that suggests anything worse than 1262
to 1257 on the S&P 500 in the near future. We can handle 3% or so down
from here if need be.

The Nasdaq hit gap resistance at the top today. This is where it
reversed and that's to be expected short-term for this under
performer. That doesn't mean it can't get back through its gap at
2720, but the job will be tougher for this area of the market with
regards to taking out big resistance levels. The S&P 500 and Dow,
along with many other areas of the market, don't have gaps that big to
work through. At any time the market could get hit across the board if
the Nasdaq continues to under perform as it really is the overall
market leader.

However, with this market really only correcting high froth, high beta
stocks, again I do believe 1257, or within one percent of that level,
should be the bottom area on any further selling, thus, get your long
list ready. At that point in time, if we get that low, even the froth
stocks will likely be ready for more upside action, even if they don't
get close to their old highs. In bull markets you use weakness to buy
the best set-ups, and this is the time to be readying yourself to do
just that. Use this time of lighter playing to make that list.

There are no real weak spots in this market other than gold and silver
for now. However, they are starting to get very oversold. They
certainly could have more downside near-term, but even they are
unwinding nicely. Stochastic's on many of the big froth stocks are
getting in to the twenties and teens, and when that happens, you call
off the dogs. The weakest areas are clear, but with them getting
oversold, it tells you not to get aggressive chasing them lower, if
that's something you have been doing.

The financials continue to hold up well and that's good to see. You
want to see the laggard of the past many years hold up while froth
winds down. The financials usually get dragged down with ease when
anything else starts to sell, but that's not happening for now, and
that's what we should be seeing in this type of environment. Slow and
easy in this period of unwinding folks. Let the froth continue to be
wrung out. Things will set up soon.

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