Jack's Wrap for 04/30/2010 - And Now Back Down...50's On Deck
When you're in a handle it is normal to simply move up and down. Feels weird as this takes place because you get a lot of volatility within a very defined range. That range being about 4% on the S&P 500. I think we can trade down in this range as low as the 50-day exponential moving average or 1170. The high in this move being 1220, although there is now a gap at 1213. If you're trading within a 50-point range you can, and often do, get some very violent swings up and down that test you emotionally. This is why you never play 100% of your money while the market is within a handle. Too much whipsaw. Although the range is defined, you get large swings within it in a very short period of time. Up 100. Down 100. Up 200. Down 200. While this process is moving along the oscillators begin to unwind down, which is exactly what this market needs. If you look at early April when essentially this handle began, you can see that the oscillators on all the major index charts have moved down about half way from severely overbought conditions. It often takes until we get oversold before we can start to head back up and that suits me just fine. Let the handle be your friend. The longer it takes the better off we'll all be in terms of new opportunities. The longer we handle and unwind the more great set ups we'll see. I am really hoping for a test down to those 50-day exponential moving averages across the board. This would really unwind things to oversold and set things up for the bulls once again. Handles ultimately do the important job for the market short- to medium-term in that they wipe out the optimism at extremes, which is what we had as of last Friday. Think of it this way. If you like to work out or play hard, there is only so much playing hard you can do before your body becomes exhausted. Once exhausted it will need sufficient time to restore itself. The market is doing exactly the same thing here. It's restoring its energy once it can get enough rest. That rest may take longer than you'd all like but that's the price we pay for the parabolic move higher we all enjoyed for the past two months in to early April. Relax and let things come to us. One thing I said I wanted was a test of the 50-day exponential moving averages across the major index charts. A small breach would be best. It's in markets such as these, however, where we can do our best learning. There are many stocks that will also ultimately hold their 50's and there are lots of stocks that won't. The ones that do are the best buying opportunities to come down the road so keep an eye on your favorite stocks and see how they handle 50-day tests. It doesn't mean that those that do lose their 50-day exponential moving averages won't perform once the market bottoms. It just means that the very best moves will likely come from the stocks that do the best job of holding their 50-day tests throughout this handle. The 50-day exponential moving averages on the major averages are as follows. On the S&P 500 it's 1170 but changing slightly each day. The Nasdaq is at 2406, and the Dow is at 10,842. These change slightly each day as well. The 50-day may act as a magnet here and that's entirely normal. The key will be how we test these 50-day moving averages. Will the bounce off of them be powerful, and will the MACD's impulse or will it be weak and labored suggesting much more time is needed to see how things develop. A strong move of some type is pretty much what always occurs. Studying the nature of those moves is what's most important, of course, and that's something I will watch with great interest. It has been some time since we tested the 50's thus I would expect at least a strong move back to the 20's and likely decently above that. It's getting very interesting as these times always are as they test our patience and resolve. Please try to keep in mind what's taking place here and roll with the process. For those of you who are bears and who want this bull market to be over, there is always that possibility that the beginning process is under way, but I wouldn't get too excited yet. Much is to be learned from how things move off the 50-day test. If we can not impulse back up on the oscillators on the next strong bounce then that will be a red flag worth monitoring. It doesn't necessarily mean the end of the bull but we will have to take notice of such an event. We have had sentiment get to extremes twice now and that's not the best of things for the bulls but it's not necessarily bad news either. Again, just something to ruminate about in terms of what's possible. For now, however, there is nothing that suggests that there is anything bad happening to this bull market. There are no reversals that suggest anything other than a normal pullback being under way and thus that's how we are going to proceed. The onus is on the bears to plow below the 50-day exponential moving averages across the board with force, then keep the market below those 50's for a few days to weeks to keep the trend flipped over to the bearish side of the ledger. For now let's focus on the pullback at hand and expect a test of the 50-day exponential moving averages. I think a test down to those levels across the board are very possible if not likely, but again, that's not at all bad news to this bull market. Peace Jack The SPDR Dow Jones Industrial Average (DIA) Daily Chart shows bearish engulfing candle on the Dow/DI today clearing through our 20 EMA by the close….major support comes into play I the 10,700-800 area.