An Oversold Bounce Wouldn’t Surprise Me


It was another rough week for the equity markets,
as the combination of turmoil in the Financial sector and surging crude oil
prices hurt stocks again.  The most significant story of the week was a pretty
brutal profit warning by Dow and market bellwether General Motors, which pushed
the stock to fresh multi-year lows and also triggered concerns about the
company’s debt being downgraded to junk status.  At the same time, Fannie Mae
and American International Group continued to share the spotlight due to
negative investigations into the companies.  With all this bearish news, market
players sold first and asked questions later.  

The June
SP 500 futures closed out the week with a loss of -14.75 points, while the Dow
tumbled -179 points, with both finishing again just off the lows of the week. 
Looking at the weekly charts, the ES and YM both broke their 10-week MA and the
lower trend line of their rising wedge patterns.  On a daily basis, the ES and
YM both ignored Thursday’s dojis and remain trapped in a trading range defined
by 50-day MA resistance and 100-day MA support.  For you daily 3-Line Break
followers, the ES remains short with a Break Price of 1225.25, while the YM
remains long with a Break Price of 10618.

               

It was just
2 weeks ago that both the Dow and S&P 500 recorded fresh closing highs, and what
a difference just 2 weeks makes.  At the time, the market “hypesters” were out
in force, sentiment was euphoric and most market players were focused on when
the Dow would take out the 11,000 level.  Two weeks later, the NASDAQ Composite
has closed at a new low for the year, while both the Dow and SP 500 appear to be
on path to test their lows.  This was a perfect case of the market doing its
best to cause the maximum amount of pain to the majority.  While I don’t really
believe the major indexes are about to slip into a major slide, many of the
recent developments have become bothersome.  Anytime so many Financial companies
are having severe problems, it creates significant risk to the entire Financial
system.  Then there are soaring commodity prices, which could make it difficult
for the Fed to eventually stop raising rates.  And finally, we continue to see
Tech Retailer after Tech Retailer warn that end demand is slowing. 

Given the
issues I highlighted above, there’s definitely a good reason for the current
correction that we are seeing.  The equity markets are oversold at the moment,
and sentiment has shifted to decidedly more bearish in the last 2 weeks.  As
such, I wouldn’t be surprised to see a sharp oversold bounce in the near-term.

 

Please feel free to email me with any questions
you might have, and have a great trading week!

Chris Curran