With regard to the market situation, I present below an interesting comment from Sam Collins, published in the Daily Trader´s Alert:
Why the Market May Reverse Before Week’s End
Institutional buyers will likely emerge creating another reversal
More economic uncertainty in Europe, tornadoes in the United States, and another belch from one of Iceland’s volcanoes sent stocks tumbling yesterday. But is the rally over? Should we “sell in May and go away”?
This chart paints what appears to be a grim picture. The S&P 500 has sliced through support at not only the 1,332 line, but also the 50-day moving average (blue arrow). The significance of this is that the short-term trend is confirmed to be down. And now the intermediate trend is in serious doubt, as well. However, before we pack it in for the summer, take a look at the Russell 3000 chart.
This interesting chart shows that, since February, the Russell 3000, which covers about 98% of all U.S.-traded stocks, broke its 50-day moving average for the third time this year and recovered from the first two. The first time this support was violated was in March, but instead of continuing lower, it reversed and in five days was above the blue line again. We called that episode the “deep V reversal” because of its depth and the rapid advance that followed. Within 10 days, it was challenging the February high. The challenge failed, however, and the failure led to the next penetration of the 50-day on April 15. But within just three days, the index vaulted above its blue line, and this time it established a new high.
Will this pattern repeat itself? No one can be sure, but note that the internal indicators of the Russell 3000 flashed oversold readings, which are highlighted by the three pairs of red arrows pointing to the valleys of the stochastic and momentum indicators, and they are again flashing “oversold.”
Now, back to the S&P 500 chart. The reversal of mid-April was a two-part affair, shown by the two red arrows that point to significant support at 1,302 to 1,305. This reversal defines the lower line of a support zone that is at 1,302 to 1,332. It is important that the present correction holds within this zone since a violation of it would turn the intermediate trend to down.
Yesterday’s news was grim as U.S. markets reacted to Europe’s problems. But volume on the NYSE was low at just 867 million shares — too low for a meaningful sell-off. And the sentiment numbers from AAII (a contra-indicator) show that the public’s fear level is the highest in nine months with just 26.7% bullish and 30% bearish. Such a high level of fear usually precedes a turn up in the market.
Conclusion: The three-day Memorial Day weekend means that only one day of trading in May will occur next week. The month will effectively end this Friday. I believe that the chances are high that institutional buyers will appear to “even up” positions before the month ends, creating a fourth reversal from below the 50-day moving average. However, even if the reversal occurs, we would be wise to go to cash until the market signals the direction of its next move. As Shakespeare wrote, “discretion is the better part of valor.”
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