The market is begging to move higher based on how far it has fallen in such a short period of time. Quite the intense move lower, but what makes it look so technically bullish short-term is the very powerful positive divergences that exist in many areas of the market. While the S&P 500 and Dow didn't make new lows you can see by the MACD's, if they had they would have created massive, positive divergences. The Nasdaq has been lagging badly and did make a new low. That new low has the potential for a positive divergence to kick in. The divergence is no where near as powerful as those of the S&P 500 and Dow, but a divergence is a divergence, and the Nasdaq has one, smaller in size though it may be.
There were some statements made in Europe last night regarding defending Deutsche Bank AG, a critically important bank that has been getting killed lately, and then a rally ensued. This rally caused our futures to reverse up, with some real power behind it. We gapped up huge. The banks were rocking up early on, and were responsible for carrying the market higher, but then came Janet Yellen to spoil the move in the banks on a dime. She was asked about the possibility of using negative rates here at home as we saw done in Japan. While she didn't say yes to that possibility she also didn't say no. She left the door open, which implied how weak things are on the economic front. Banks don't like the prospect of lower rates, and so the selling began in earnest in that sector alone.
Banks are heavily weighted, and took the Dow and S&P 500 off their highs. Without the banks performing in the future, it's not easy to get excited about what those MACD positive divergences are capable of doing. Again, those divergences on the S&P 500 and Dow are large. Very large to be honest. The type of large that can bring about many weeks of upside action overall. Yellen took away what would have been an explosive up-day for the market. That doesn't mean the market still can't play out at least some of those divergences, allowing for decently higher prices in the next few weeks. Only time will tell us what's possible. Yellen is usually the person who rocks the market higher. Today she was the Grinch.
I think what's troubling the market deep down is the lack of confidence from Ms. Yellen. When you look at how our economy is falling with regards to manufacturing and services it's scary enough. The market would look past the numbers if the Yellen would speak in a way that said not to worry. If she would talk confidently about how she sees the economy is improving, and how rates can continue to rise without fear of hurting the economy, we would be rocking up. Keeping in mind, the market ALWAYS want to go higher, and if she showed confidence, the market would run with it. The problem is she's showing fear and anxiety. To even think about negative rates means she's uncertain. If she's uncertain so is the market. We can't know what she knows, so we look to her for signs. We have all learned to read her body language when she talks. Today that body language was one of nervousness. One of uncertainty. She's being honest, which is good and necessary.
At least she's deflecting things and hoping things get better, so she can tell a better story later on down the road. She's just being honest and telling us that she's not excited about our economy, especially the global economy, and so things could worsen here at home. This likely puts a halt to anything wonderful for the market once and if those divergences play out to the up side. Try to keep in mind just how far and fast we fell. Normally, even in a bearish environment, you'd see some strong retrace back up. Market wants it, but we'll see how much we can get. The banks today painted a not-so-rosy picture, but even the banks can be dragged up some if those MACD's play out over the next few weeks, but they'll likely lag behind other stronger areas. Careful where you go if you decide to play long.
It's possible that we'll just meander around, back and forth, for some weeks, with an upward bias to work off the divergence and unwind daily and short-term oscillators. The environment couldn't be more difficult if it tried. So many opposing forces currently at work. Positive divergences versus poor banks. The need to unwind oscillators up versus bears getting more aggressive on rally attempts. Again, we should rally and rally hard, but we'll have to see the banks firm up in a big way before getting excited about a bigger rally with some staying power. Day to day as I try to figure out this nonsense.
-Jack
Jack Steiman is author of SwingTradeOnline.com, a live Trading Room of his swing trades and technical market analysis. Former columnist for TheStreet.com, Jack is renowned for calling major shifts in the market, including the bottom of the bear market in mid-2002, the market top in October 2007, the late 2008's market crash (when he was 100% in cash), and the market bottom in March 2009. A free 15-day trial to Jack’s Trading Room is available at www.SwingTradeOnline.com.
