Stock Market Vital Signs Weak

The stock market's price action Wednesday doesn't bode well for its overall health.
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By Chris Vermeulen of TheGoldAndOilGuy.com

NEW YORK (

TheStreet

) -- The stock market has seen some wild price swings due to earnings reports and comments from

Fed

Chairman Ben Bernanke.

I have pointed out that such a stock market environment gives you only a brief moment to take profits before the market starts going wild, shaking traders out of positions. This increased volatility stems from a couple of things:

    Stock market participants know the financial system is still riddled with unethical practices/manipulation. This causes everyone to be extra jumpy/emotional and causes volume surges in the market as the herd starts to get greedy or fearful.

    Volume overall on the buying side of things just isn't there. I see some nice waves of buying, but it doesn't move the market up much. Then it only takes a small wave of sellers for the market to drop. Investors are just scared to buy stocks, and that is not a good thing.

    I keep a close eye on the buying and selling volume for the

    NYSE

    as it tends to help pin tops and bottoms within a 2- to 3-day period. In short, when we get panic buying by retail investors, the smart money starts to scale out of positions.

    These retail investors are buying on news and excitement much like what we are seeing now with earnings. Stocks have a good run-up as the smart money buys on anticipation of good news, then the better-than-expected earnings are released, and the stocks pop and drop. Well, the pops higher on

    big

    volume are all the retail investors. They're generally the last ones in.

    My point here is that generally there are four to six of these panic buying or selling days a year that are tradable.

    The crazy part is that we have seen 11 such panic days (both buying and selling) in just eight weeks. We are seeing more selling than we did at the bottom in 2009! Something big is about to happen, and I want to make sure we get a price of it once the moves starts.

    Below is a chart of the

    S&P 500

    showing how the index is trading under some key resistance levels. On Wednesday, the market gapped up, testing the 50-day moving average and breaching the 5-day moving average, then it sold off very strongly during Ben Bernanke's speech. This is not a good sign for the overall health of the stock market.

    On the commodities side of things we are not seeing much happening with gold or oil at the moment. Gold is still in a short-term downtrend. And gold took an $8 drop Wednesdsay when Ben Bernanke said inflation would remain low for an extended period of time.

    As for crude oil, I pointed out Wednesday that it had a big run-up Tuesday on virtually no volume and that it would most likely give back those gains Wednesday. We saw that happen, with oil dropping from $78 per barrel to $76.50. Overall, oil looks like it wants to go higher but has some work to do before that can happen.

    Mid-Week Trading Conclusion

    In short, the market remains choppy, and we are getting more than normal news/events moving the market and causing extra noise and volatility for traders. Cash is king during volatile times, so if you are doing some trading be sure to keep your positions small for another month or so.

    If you would like to receive my detailed trading analysis and alerts be sure to check out my Web sites

    www.TheGoldAndOilGuy.com

    and

    www.FuturesTradingSignals.com

    .

    -- Written by Chris Vermeulen in Collingwood, Ontario, Canada.

    Chris Vermeulen is founder of the popular trading sites www.thegoldandoilguy.com and www.ActiveTradingPartners.com. There he shares his highly successful, low-risk trading method. Since 2001, Chris has been a leader in teaching others to skillfully trade in gold, silver, oil and stocks in both bull and bear markets.