The Question On Traders’ Minds

June 27, 2005
Chris Curran

The major indexes suffered a setback this week,
as worries over rising commodity prices finally started to have an impact on
stocks once again.Â Market conditions were anemic in the first 3 sessions, with
the common theme being strength in Tech shares, while weakness was seen in
Industrial Metal and Transportation names. Â However, things changed on Thursday,
when the tech-heavy NASDAQ Composite failed again at the key resistance level of
2100.Â Equities finished firmly lower on Thursday and followed with an ugly end
session Friday.Â Overall, it appeared as the long awaited correction has finally
started.

The June SP
500 futures closed out the week with a loss of -24.75 points, while the Dow
futures posted a larger relative loss of -318 points, with both erasing more
than 2 weeks of gains.Â On a weekly basis, the ES and YM both posted market
structure highs and key reversals down, and continue to form the right shoulder
of a Head & Shoulders pattern.Â Looking at the daily charts, both contracts
extended Thursday’s losses, with the ES testing its April high now as support.Â
The YM, however, really has no support down to its May low, which is another 250
points south.Â For you daily 3-Line Break followers, the ES is short with a
Break Price of 1221, while the YM is also short with a Break Price of 10646.Â
The VIX is a bit extended here and testing its daily downtrend line, so we could
see a day or 2 of upside to work off the short-term oversold condition.

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After
the last 2 sessions, the question on many tradersâ€™ minds is likely how severe
the current sell-off will be.Â To answer this question, it’s important to
remember that not much has changed since the sell-off that took place in March
and April.Â Commodity prices continue to rise, while the Fed remains firmly in a
tightening mode.Â Also, the economic slowdown that was feared does in fact
appear to be unfolding, just not as rapidly as expected thanks to the retreat in
the long end of the yield curve.Â Warnings season is also just now starting,
which almost always causes problems for stocks.Â