Will June Mean More Distribution and Selling in the Stock Market?
May 28, 2010 1 Comment
May 28, 2010
Michael A. Doran
Friday going into a long weekend experienced further selling on light volume. This was to be expected as traders exit into the long weekend. It always amuses me when the market is in midst of a correction and the expansive amount of various pundits jawbone that investors should “expect increasing volatility”.
Let’s cover where we might we be headed in June and what are some things we need to consider to develop a plan. In order to do so, first we have to look at the general market.
THE GENERAL MARKET
From a technical damage point of view the market has been in a somewhat serious correction for most of May. Our 4/30/10 Market Pulse Blog Post – http://www.physiciansmoneydigest.net/blogs/market-pulse/04-2010/stop-look-listen-market we showed you a chart of the S &P Index. We were correct in predicting this correction and it was almost textbook at the level it occurred. I actually thought that the market could be grinded a bit higher to fool the market technicians.
What we expect going into June: The major stock market Indexes are fighting to reclaim the 200 day moving average which large institutional traders pay attention to as a key technical level. Many traders believe markets and stocks trading below the 200 day signals, an oncoming or resumption of a longer term bear market. When a break of a major trend begins to occur, large institutions or “the composite Market operators” don’t want extended downward selling pressure until they can more profitably unload positions. In my opinion, what we are seeing now is a real Battle Royale to keep stocks and the general market above the 200 day Moving average. Fortunately we have tools such as our breadth indicator tools to look under the hood and will help us decipher in the weeks ahead the true “quality” of the attempted rally.
One scenario we will watch for in the upcoming weeks is a bounce and weak rally attempt , which could form a right shoulder on a larger head and shoulder type pattern in the major S&P 500 index. This pattern began forming in October of 2009. What we may see is a low volume price recovery through part or most of June or so, and then sell on the earnings news into August. Volume is usually always weak during the summer. Combined with negative investor psychology and macro events like the Europe financial mess and gulf cleanup, a wait and see attitude may take us through part or most of summer making it easier in the short term to create the impression of a rebounding market.
Keep in mind recent economic news is not that positive. However, the low bar on earnings revisions could begin to show signs of crumbling as 2nd quarter earnings come out. This plausible scenario of a weak rally attempt in the weeks ahead could be buttressed on expectations of continued good top line and bottom line growth and then sell off into that expectation. If early short sellers can be run in there should be some evidence of this over the next few weeks and would help a weak rally. Time will tell but this could present a very good shorting opportunity.
POSSIBLE TACTICS
The CANSLIM® method of which we trade intermediate term will be much more feasible upon a more discernable uptrend and technical follow through.
For right now, this is a traders market and you must be very quick on your feet to make any money. I would even go so far as to say this last week has been really a scalpers and much more random trading environment.
Powerful short covering rallies can surface like yesterday when the DOW S&P and NASDAQ were up 2.8 to 3.5% in one day. If you must trade short or long it is best be prepared to do so in a much smaller time frame. The first few days after an attempted rally, as we saw Tuesday May 25th, can be big point spreads accompanied by lighter volume signals short covering. It is not a good idea to trade randomly which is very low Reward to Risk. Our plan is to increase exposure when we can determine lower risk entry points. Sometimes that is not possible with increased randomness as we saw this week. So any positions are generally held for a day or two, scalp some profits where you can and see what develops overnight.
I believe it is important to let things set up properly and only trade for 3:1 reward to risk trades no matter what time frame you are in. The beauty of following a more intermediate time frame style of investing like CANSLIM® is to wait for the market to properly set up and follow through. This should be accompanied with being able to find potential leading stocks forming proper chart or basing patterns. Remember, you don’t have to be in the market at all times. If you insist on trading short term realize you are really only scalping or short term swing trading. It is critical not to lose sight of the time frame you are trading and investing.
Our next journal and post will address the concept of being “Snake-bit” and investor psychology affecting the market. We will also peel back the layers on a few stocks that could be setting up for possible short or long entry.
Have a great Memorial weekend!
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