The Sideways Action Continues

Monday, August 22, 2011
Stock Market Commentary:

Stocks bounced off support as buyers showed up and cheered the news that Libyan rebels are very close to toppling the Qaddafi regime. In the U.S., the window remains open for a new FTD to emerge which will confirm the current rally attempt. Technically, as long as last Tuesday’s (8.16.11) lows hold. However, there is no rush to buy ahead of a FTD because doing so increases the odds of failure. To be clear, the bears remain in control of this market until the major averages close above their longer term 200 DMA lines or a new FTD emerges. A new follow-through day will emerge when at least one of the major averages rallies at least +1.8% on higher volume than the prior session. Until that happens, this is just a normal “oversold” bounce. Near term resistance remains the 200 DMA line and near term support remains the 2011 lows.

Libyan Rebels Capture Qaddafi’s Sons & Death Cross In Major Averages:

Over the weekend, Libyan rebels made significant progress in their ongoing attempt to over throw Qaddafi’s oppressive 42-year regime. Economic news was quiet on Monday as investors await new home sales, durable goods orders, gross domestic product, and Ben Bernanke’s speech at the Fed’s annual Jackson Hole, Wyoming symposium later this week.

We are a bit surprised that virtually “no one” is talking about the fact that all the major averages’ 50 DMA lines undercut their longer term 200 DMA lines earlier this month. This is also known as a “death cross” which suggests, lower, not higher prices lie ahead. However, this is not 100% accurate. The last time this happened was July 2010 but the sell off was short lived and stocks rallied hard over the next 10 months (largely thanks to Bernanke’s Jackson Hole speech where he announced QE 2). It is very important for the major averages to continue trading above their August lows in order for this market to rally. Conversely, if August’s lows are breached, one could expect another leg lower in this brutal month-long correction.

Market Outlook- Market In A Correction

The latest action in the major averages suggests the market is back in a correction as all the major averages remain below key technical levels. Our longstanding clients/readers know, we like to filter out the noise and focus on what matters most: market action. That said, the recent action suggests caution is paramount at this stage until all the major averages rally back towards their respective 200 DMA lines. If you are looking for specific help navigating this market, please contact us for more information.

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