Support Now Becomes Resistance

Tuesday, June 07, 2011
Stock Market Commentary:

Stocks and a slew of commodities tried to bounce on Tuesday before a late day sell off sent markets lower by the close. Remember, it is quite normal to see markets “bounce” after a steep move in one direction. Going forward the key is to study the “bounce” and wait for a powerful up day to confirm a new rally attempt. Ideally, that day will occur when the major averages are back above their respective 50 DMA lines. Until then, the bears remain in control of this market. So far, the old adage, “Sell in May and Go Away,” appears to be working brilliantly as all the major averages and a slew of key commodities are down significantly from their May 2nd highs.  From our vantage point, the market is back in a correction as the major averages are all below their respective 50 DMA lines and multi-month upward trendlines.

Fisher & Bernanke Speak- Financials Gain:

Before Tuesday’s open, Dallas Fed President, Richard Fisher, told  CNBC that he is expecting the U.S. economy to rebound nicely in the latter half of the year. It is important to note that 2010’s economy started off slowly but picked up nicely in the latter half. Many attribute that strong rebound to the Fed’s QE2 program which pumped hundred’s of billions of dollars into the market (and is scheduled to end this month). Fisher is not a fan of QE 2 and said he does not favor QE 3. 15 minutes before the close, Fed Chairman Ben Bernanke spoke in Atlanta and largely reiterated his recent stance: the economy continues to improve while inflationary pressures remain transitory (short term in nature) and any further action from the Fed will be “data dependent.”

Market Outlook- Market In A Correction:

From our point of view, the market is back in a correction now that all the major averages closed below their respective 50 DMA lines and important upward trendlines. Since the beginning of May, we have urged our clients and readers to be extremely cautious as the major averages and a host of commodities began selling off.

For those of you that are interested, the S&P 500 hit a new 2011 high on May 2, 2011. Two days later, on Wednesday, May 4, 2011, we turned cautious and said “The Rally Was Under Pressure” (read here). Then on Monday, 5.23.11, we changed our outlook to “Market In A Correction” (read here). On Monday June 6, 2011 we pointed out that the S&P 500 violated its 9-month upward trendline (read here) and reiterated our cautious stance. We have received a lot of “thank you” emails for being “spot on” in our cautious approach. We are humbled by your presence and very thankful for your continued support. Looking forward, the next level of resistance for the major averages is their respective 50 DMA lines then their 2011 highs. The next level of support is their longer term 200 DMA lines. If you are looking for specific help navigating this market, please contact us for more information.

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