Just after 2 PM ET yesterday, we had a bout of good news out of Japan when there were claims that power was being restored near the reactors and water could soon resume pumping.  Stocks moved sharply higher for about 30 minutes, but the rally was quickly sold and the indices closed just off their lows.

Believe it or not, the market has been holding up rather well so far, all things considered.  The S&P 500 is only about 6% off its recent highs and considering the turmoil in the Middle East and a devastating earthquake in Japan - complete with a nuclear scare, that is not too bad.  The question is, will this be one of those 5% to 10% pullbacks, or are we headed for an full correction (-10% or more) or even a bear market (-20% or more?)

Only the short-term trendlines have been broken, but support is getting fewer and farther between.  Officially, we could see a move all the way down toward 1125 and remain in a longer-term positive trend, but obviously we are more concerned with today and the next few weeks and the next target levels are posted below.

The 20-day EMA is still above the 50-day EMA but it is sinking fast.  It has been my experience that when these two EMAs cross (20 below the 50), we could get an oversold bounce.  Some of these oversold rallies can be quite strong, but it is usually best to sell them.  I would not be surprised to see a move back to the 50-day EMA (1294-ish), but after that we'd have to re-evaluate as this chart has been broken.

                        Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

The horizontal red line is actually a nice place for a pullback to find support as it is where the S&P 500 broke out of a nearly 8-month consolidation.  Resistance, once broken can act as support on a pullback, so we'll have to see if it can hold on a test (near 1232).

Taking a look at the put/call ratios and we see that the smart money, who I had basically given up on, were correct in their extreme bearishness a couple of weeks ago. 

Both the dumb money (CBOE and Equity ratios) and the smart money (OEX) are now trending downward (more bearsih) but if you notice, the smart money has already started lightening up on their bearish bets, while the 2 dumb money ratios are moving down.
                        
                        Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

This indicator is back in business and I think we can use the extreme dumb money bearishness (when it hits the lower end of the descending trendlines) and the smart money (when it moves to the top of its descending trendlines) as good areas to look for a bounce - and we're almost there.

Then, when the dumb money bounces back toward the top of the trendlines, and smart hist the lower end, it will be a good time to sell again.

I did not listen to my own warnings, and because I did not want to use my last available Interfund Transfer in March so early, I foolishly sat in the stock funds for most of the way down.  Now I am in looking for one of those dead cat bounces, hopefully up toward the 50-day EMA, to use that IFT to get out.

Some of those rebound rallies can be quite strong, as I mentioned, and I think any good news out of Japan could trigger one.  But this market has made a turn for the worse and chances are the rallies will be short-lived - even if strong.  If the S&P can pull a miracle and somehow move back above the 50-day EMA on a rebound, that would complicate things.

I am aware that market crashes do manifest out of bad situations like we are in now, but a rebound is more likely.  If we do get a crash, I'll  just be out of luck and have to endure it.  If we don't, I'll be selling either slowly, or all at once, depending on the magnitude of the rebound. 

Thanks for reading!  We'll see you tomorrow.

Like I did after the earthquake in Haiti, I set a fundraiser with MercyCorps for anyone looking for a way to help.  Please go here for more information.  Can you spare a $1 - $10 to help the folks in Japan?  Thanks!

Tom Crowley