Top Advisors Corner

Jack Steiman: In Need of Extended Period of Basing, or Slightly Worse


The market came into Monday with the short-term, 60-min charts mostly oversold. Barely above 70 RSI on the Nasdaq and small-caps stocks, but in the mid-20's on the RSI's on the S&P 500 and Dow. Bull markets don't stay oversold for too long, unless a more severe selling is upon us.  That has yet to show its hand, so no shock that we saw the market head higher slowly but surely throughout much of the day. No great thrust, but a nice move upward throughout most of the day. By the time the day was over those short-term index charts were no longer oversold. 

It's nothing to get excited about if you're a bull, although it's good to see things not staying oversold. Nothing to get too unhappy about if you're a bear. Not too many of them around sadly.  With the huge thrust not there and the volume contracted versus the bigger volume selling from Friday, one could say that Monday was a day of unwinding for the bears, but now we'll see if they can gather up the energy for a gap down Tuesday to continue the technical trend lower that they have somewhat established lately. To this point there's nothing bearish technically except for some warning signs that are up, so if you are buying, buy the prime leaders that can withstand further selling.
When looking for good or bad news, we look towards the financial stocks of the world as they continue to tell us things aren't bad. Yet! They are holding up very well, with the regional banks, in particular, holding things up on their end. The last time this happened the market was rocking until we saw a sudden breakout failure. Down the market went. Now, these stocks are mostly basing, so there isn't the breakout pressure to hold onto them. Just a nice steady move laterally upwards. Basing can help unwind overbought, daily market oscillators without creating too much in terms of price erosion. The market is best served now with that type of action.
So the market is holding up while relieving pressure on those key daily oscillators. Meanwhile, the bulls are calming down a bit. We're already at silly levels of froth and we certainly don't need more breakouts to create even more froth. The market needs an extended period of basing to slightly lower in order to remove the bull-bear spread from at least the +40% level. It's not healthy up here and hopefully last week started us moving down at least a little bit. We'll know more on that Wednesday morning when we get the new readings. Calm would be a good thing for now. The harder we fall the faster we create fear, but you can change that by moving more laterally as well.
Playing a market environment such as this with aggression can be hazardous to your wallet. There are three gap downs the bulls have to deal with. That puts pressure on the bulls and gives the bears a lot more confidence. That's real technical damage for the short term, and shouldn't be ignored when it comes to thinking how much exposure you should have. One gap was filled, but there was no close above the gap, so in truth we have three gaps still open to the down side.
When in a bull market you never want to discount the possibilities of a strong move higher, but these gaps will make any journey upward more labored. Always possible, of course, but the odds aren't in favor of the bulls to allow this market to explode higher quickly. You have to be prepared for the possibility that we can sell harder. Watch those financials for more insight. Watch for another potential gap down within the next few days. If the S&P 500 loses 2020 support on a closing basis, the selling should kick in much harder, but we take this day to day as always.
Keep things a bit lighter. Play only the best of the best if you do play more aggressively. Do what you want of course, but that would be my advice. Safety time. I would avoid the world of froth stocks.

Jack Steiman

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