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Weekend Market Commentary : 20's Break...50's Holding...For Now...

 October 02, 2009 06:38 PM


(By Robert New and Jack Steiman at Theinformedtrader.com)

Market Overview:

We can remember the beginning of October as the time when the major indexes across the board lost their 20 day exponential moving averages. The market had traded above them for many months. So long in fact that they were able to cross over the 50 day exponential averages which is quite bullish. In bullish trends the lowest moving averages are trading above the next highest ones we follow such as 20's over the 50's and 50's over the 200's. Things had been going along beautifully for quite some time but the past few months saw much more of a grind as we began to encounter negative divergences on each new move higher on those important daily charts. Not only that, but we also saw massively overbought conditions take place not only on those daily charts but on the weekly charts as well. A lethal combination that had gone ignored for quite some time, thus the reason for not shorting even though it felt like we should. Last week we started to see some signs that there may be trouble when we got up to 1080 on the SP, the gap top from the October 2008 gap down to 1060. We had traded in that gap for some days before finally reaching the top and then reversing back down hard. On Monday of this week we made another attempt to get back through the bottom of that gap at 1060 but that failed and down we went ever since. On Thursday we finally lost the 20 day exponential moving averages on some bad economic news, although in reality those reports were just an excuse for what was going to happen anyway. On Friday we had an absolutely horrific jobs report that took the market below those line in the sand 50 day exponential moving averages pre market. I reported this week that it was extremely unlikely we'd take out those 50's on the first test and somehow that became a reality as we gapped down just above those levels and climbed back for the rest of the day. The news was bad enough to justify a loss of the 50's but the market refused to give way. At that moment of testing the short term charts had gotten extremely oversold with rsi levels averaging 25 on the major indexes. Anything below 30 is extremely oversold thus the combination of oversold and critical support gave the bulls some life. They fought and held but it wasn't exactly a rousing reversal up either. With the 20's now lost, that area should act as some resistance on moves back up and with in mind, the bulls are less likely to get aggressive should we approach those levels in the days to come.  Although we held those 50 day exponential moving averages today, there was some technical damage to this market this week. It doesn't mean things are over for the bulls but it does mean any further upside from here will be more difficult than it had been in the past months.

[Related -High Bond Market Returns Offset Commodity Losses of Diversified Portfolios]

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There are many who are already declaring the bull market off the March lows dead. That may very well be true but don't fool yourselves in to thinking it's a done deal either. It is normal and expected for markets to test down to those 50 day exponential moving averages from time to time. That allows for the oscillators to unwind and for any negative divergences that formed to be wiped out. The higher you go in a bull, meaning the higher those Macd's go, the odds increase that at some point they won't be able to keep up with price thus creating the negative divergences.


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