In our editorial of 8th February 2010 we asked “Did We Just See a Meaningful Reversal in the Stock Market?” We emphasized then, that we still expected a 10-15% correction after that brief pullback we experienced in January 2010.
Shortly after we issued another editorial on April 16, 2010 (entitled “Warning: 2010 Could Be A Bad Year For Stocks!”) we said this: “We have seen nearly an uninterrupted market rally over the past 12 months. At this point it’s our belief at ProfessionalStockTraderLive.com that it is time to become very cautious the market. The time has come to go on the defensive and take steps to protect your gains and portfolio.”
The high of 1219.80 on the S&P 500 on April 26th 2010 to the intra day spike low of 1065.79 on May 6th 2010 gave us a 12.62% correction. This correction was directly midway between the 10-15% correction we called for. Incidentally, the 1065.79 on the S&P 500 came down almost exactly to the 50 week simple moving average (SMA) 1065.38, incredible how close it got.
Why the reason for the drop we do not know as of yet. Could it have been a fat finger? Maybe. Was it something more sinister? Maybe. Could it have been the brokerage and mutual-fund firm Waddell & Reed Financial who sold a large amount of futures contracts exacerbating the decline that day? This is what the Wall Street Journal was reporting a week later. Or was it simply a drop that eventually got perpetuated by algorithmic trading? Maybe. The bottom line though was we knew the market was heading down over concerns over the Euro zone and the Greek debt problems and the possibility of contagion. As expected, the EU and the IMF stepped in pledging a $1 trillion dollar bailout. Since the bailout, we have seen the markets rally somewhat. Whether the bailout works or not is debatable. We at ProfessionalStockTraderLive.com still believe there will be some lasting ripple effects of all of this and the final page to this story has yet to be written. The reality is the bailout really does not address the problem itself, it is merely a bandage.
Where to next? Extremely Tough Call…
The big question is where do we go from here with the stock market? We feel it is an extremely tough call but will stay open minded and respect the tape action. We do have an opinion the stock market should not be onward and upward to new highs as pundits say. Upward movement could certainly continue, and that really would not surprise us at all knowing how Wall Street operates. With more liquidity coming into the markets due to the Euro land bailout, this certainly could point to higher stock prices in the U.S. When priced in depreciating Euros the U.S. stock market looks attractive from across the pond doesn’t it? There is no question, the economic backdrop has improved here in the U.S but should that really mean significantly higher stock prices? Probably not. But it very well could.
Our personal belief is that volatility is here to stay for some time and we should trade in a broadly defined range of SPX 1065-1250 for the extended foreseeable future. Of course, all this could change with one positive or negative development, stay tuned!
We believe one needs to pay close attention to the following to stay one step ahead:
- Euro zone debt crisis - how it evolves and will there be more bailouts needed? We still do not believe we have heard the last of this. As we write this, Forbes reports rumblings and rumors of the downgrade of France’s debt. Contagion anyone?
- Economic reports - will we see continued improvements in the health of the economy and are they meaningful?
- Summer doldrums - can make for tough trading. Will it really be dull this year?
- Technical picture - if we move to new highs on the averages will it be confirmed by various technical indicators?
Words to the wise if you are an investor - only buy stocks with true value. As for day traders: be patient, disciplined and have a minimum of a 2:1 risk/reward ratio. Following some simple rules if nothing else will keep you out of MAJOR trouble.
Since late November 2009, we have been teaching our members in our nightly video updates and daily live webcasts to be vigilant in this continued complex market environment. While we believe we can rally and make new recovery highs at some point we are very skeptical of any rally that goes straight to new highs of 1120+ on the S&P 500 (SPX). We still have a major gap that may get filled at 1110.88 from the May 7 close. Major resistance levels still come in at S&P 500 around 1228.74 (61.8% Fibonacci retracement level) and DJIA 11245.95 (61.8% Fibonacci retracement level).
Regardless of how you play the market, at ProfessionalStockTraderLive we always preach for our members to be patient, disciplined and use stops.
