Should Traders Be Bullish or Bearish Now?

01/24/2011 10:45 am EST

Focus: STRATEGIES

Depending on what type of trader you are and what you focus on the most for trading, you could be either bullish or bearish on the stock market right now. The charts below show how the Dow Jones Industrial Average is bullish, while the small cap Russell 2000 is bearish. Options expiration last week really mixed up the market as the market makers and the big money players manipulate stock prices in their favor.

Let’s take a look at the charts.

Dow Jones Industrial Average Daily Chart

Crude oil has been holding up very well the past couple weeks, and that has had an impact on the Dow. Additionally, IBM had a huge move up, which accounts for almost 10% of the DJIA's price action. Both these factors have skewed the Dow index to look bullish.



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Currently, the price is trading above the five-period moving average after briefly tagging it on Friday and then bouncing higher. Volume has picked up, indicating more people are exchanging positions because of a shift in sentiment. Remember, the Dow represents only 30 stocks, so it does not provide a solid view of the overall market strength.

S&P 500 Daily Chart



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This index closed below the five-period moving average with rising volume once again, indicating a shift in trader sentiment. The S&P 500 is heavily weighted with financial stocks, and with the financial sector under pressure last week, it helped to pull this index down. The fact that it closed below the five-period moving average is just a warning sign to be cautious. The overall trend is still up in this index.

NEXT: Timely Look at Nasdaq and Russell 2000 Indexes

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Nasdaq Daily Chart



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As you can see, in the technology-heavy Nasdaq index, there has been more selling going on. The Nasdaq closed below both key moving averages and is now testing the 20-period moving average, which is the line in the sand before I turn bearish on this sector. Tech stocks are typically a good indicator for the overall health of the market, and if it does not recover this week, or if it forms a light-volume bear flag, then look out below.

Russell 2000 Small Cap Stock Index

Small cap stocks are usually the first to pull back in the market. As you can see, there is a big difference between this chart and the Dow Jones.

Small caps have broken key moving averages and are now nearing the 50-period moving average, which I figure will provide a small bounce or pause before crashing through it. But with the amount of selling volume happening in the small caps, it could just drop through that level and keep on going. Only time will tell, and it’s best to wait for a low-risk entry point before taking a position.



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Trading Conclusion
In short, the major indexes are giving mixed signals. While the Dow and S&P 500 are still bullish, we are seeing tech and small cap stocks break down. If things work out like they have in the past, then the market is truly starting to put in a top. It could still take five to ten days to play out. Usually, the market will get choppy with large, back-to-back up and down days, and volatility will rise, which can be seen by watching the VIX. I am currently neutral on the market and waiting for a low-risk set-up to unfold.

By Chris Vermeulen of TheGoldandOilGuy.com

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