Jack's Wrap for 05/03/2010 - Classic Handle Action Yet Again..
Just when you think all is doomed the market surprises yet again. After watching what happened to the market on Friday I'm sure most of you were thinking that today would be a follow-through disaster. That the market had finally, since its best days, and now it was down-hill time for the averages. Not to be, though, was it! Once again a handle doing what it does oh so incredibly well. It fools the masses and plays games with your emotions. Exactly what the market big boys and girls want. To erode sentiment as much as humanly possible in order to allow the market for further upside potential in time out of this defined range currently set up, although, I think it can go lower still on the downside over time. That level being the 50-day exponential moving averages. It doesn't have to but it would be no shock to me if we did manage to go down that far because now it feels like there's no way that will happen. The market started with a nice gap up this morning off some very oversold short-term charts from Friday's sell off. Most folks thought it would be a quick turn around back down. In other words, gap and fail that would continue down to those 50's mentioned above. Not to be as the market churned for a little bit at the 20-day exponential moving averages. Would they be able to clear back through or stop dead cold and be rejected? The answer is get through, and once they did, the bears gave up trying to take this puppy down allowing for some stronger gains as the day wore on. We closed off the highs a bit but still some solid gains along with a move cleanly back through the 20's which is good action overall. Handles are what they are and today taught another lesson in what handles do and how they fool the masses most of the time. Does this mean the coast is clear? Not at all. Handles are very ragged and unclear. They have violent short-term swings that play on your emotions almost daily. I think the 50-day exponential moving average could be tested while we're in this pattern and that's all the way down at 1171 on the S&P 500 and 2406 on the Nasdaq. If those levels were to get tested at some point over the coming weeks it won't feel very good and we could definitely make a visit to this critical level of support. Respect what a handle is and can do and you’ll do fine. Best to pick up plays at their 50-day exponential moving averages and or when Dojis are printed off a down trend. Try to have gap support not too far below your entry if possible. Do everything possible to make your plays as appropriate as possible. By no means should today's action fool you in to thinking we're just going to blast up and out again. Not likely at all. Always possible in a bull market but very unlikely we see a move over S&P 500 1220 any time soon. If we do, it'll be from yet another negative divergence and that wouldn't be great at all. The longer a handle or lateral consolidation continues over time the better off the market will be. If the bears can't take things down over time, they will likely start to feel hopeless again and give up the ghost. The more mature a handle gets in time the more unwinding you get and the more you get in terms of frustration from the bulls as the up trend seems to have stopped dead in its tracks. This brings about a feeling of the good days are over and you go from 36% more bulls to somewhere in the teens. It doesn't take long at all. Finally, a mature handle makes it more likely that the pattern in place before handle came to be, a bull move, will continue yet again over time. The move from February to April was powerful. If we can handle out a few months or close to that, it will offer the best probability of a continuation of that trend. Go slow and easy in handles and do your best, as will we, to buy the safest plays out there. Peace Jack The SPDR Dow Jones Industrial Average (DIA) Chart shows a lateral flag/base forming. Favorable action today after Friday’s bearish engulfing candle…lateral chop may continue a while longer.