After correctly calling May's sharp market reversal, Mike takes a look at where the stock market might be headed in June and outlines some of the factors investors need to consider to develop a plan. One scenario Mike will be watching for in the upcoming weeks is a stock-market bounce and weak rally attempt.
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. In our May 30 blog post, we showed you a chart of the Standard and Poor's 500 stock-market 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.
Now here's what we expect going into June: The major stock-market indexes are fighting to reclaim the 200-day moving average, which large institutional traders focus on as a key technical level. Many traders believe markets and stocks trading below their 200-day averages signals the oncoming, or resumption, of a longer-term bear market. When a break of a major trend begins to occur, large institutions -- “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, 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. (You can find a more detailed explanation of the head and shoulders pattern here.) This pattern began forming in October of 2009. What we may see is a low volume price recovery through part or most of June, and then a move to sell on the earnings news into August. Volume is usually always weak during the summer.
Combined with negative investor psychology and macro events, such as the Europe financial mess and Gulf of Mexico 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.