Stocks negatively reversed on Wednesday after the Fed hinted that they may begin tapering as soon as next month. From our point of view, this marked a significant inflection point in the market as the narrative has shifted. So far, every pullback this year has been very shallow in both size (% decline) and scope (days, not weeks). Needless to say, we will be watching this pullback very closely to see if it is just another shallow pullback or something more severe. For the past few weeks we have noted that “the market is getting extended and a pullback of some sort rises everyday as the S&P 500 keeps getting extended from its 50 DMA line.”
MONDAY-WEDNESDAY’S ACTION: Fed Spooks Markets
Stocks were quiet on Monday as investor’s attention shifted to commodities. Gold and Silver rebounded sharply after falling hard in overnight trade. At one point, Silver plunged over 8% and took out April’s low. By Monday’s opening bell, the bulls quickly showed up and quelled the bearish pressure leading many to question whether or not silver is tracing out a potential double bottom pattern? We are of the mindset that both Gold and Silver are in bear markets and until that changes, the Separately, a slew of oil and gas stocks surged on Monday as the USO (Crude Oil ETF) broke out of a 9-month downtrend.
THURSDAY & FRIDAY’S ACTION: Nikkei Plunges
MARKET OUTLOOK: CONFIRMED RALLY
For weeks we have mentioned that the market was over extended to the upside and due for a light volume pullback to shake out the weak/late longs. The bulls would like to see this market pullback in light volume and find support at/near their respective 50 DMA lines. It is important to note that the S&P 500 held its 50 DMA line almost to the penny in the middle of April on a closing basis which was a very healthy event. We will be closely watching these key areas and how they react with respect to their 50 dma lines: The Nasdaq Composite, Nasdaq 100, Housing (XHB), Financials (XLF), Transports (IYT), Health Care (XLV), Utilities (XLU), Small (IWM) and Mid caps (MDY) are all back above their respective 50 DMA lines. For those of you that are new to our work, I keep track of the market status differently than other people. My goal is to remain in sync with the broader trend of the market (up or down) and not get caught up with the minutiae of changing labels on the market status very often. Looking forward, the bulls remain in control of this market as long as the benchmark S&P 500 holds above its 50 DMA line. As always, keep your losses small and never argue with the tape.
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