Has the Market Put in a Bottom?

by Serge Berger | June 20, 2011 8:23 am

Has the Market Put in a Bottom?

Editor’s note: Serge Berger, the head trader and investment strategist for The Steady Trader[1], will be providing the Daily Market Outlook until Sam Collins returns on June 27.

Quadruple witching Friday came and went, and although trading was choppy and unpredictable intraday, the broader picture hasn’t changed much. Stocks closed up marginally for the day on Friday, and in the case of the S&P 500, eked out the first weekly gain in seven weeks. Small caps, as measured by the Russell 2000, also closed the week in the green, but the tech-heavy Nasdaq recorded losses for the third week in a row. 

The doji on the weekly chart of the SPX doesn’t mean much for the bulls unless we get upside confirmation in the way of a good rally next week. 

06 20 11 spx weekly Has the Market Put in a Bottom?

See full-size chart[2]

As a reminder, on the daily chart, we bounced off the 200-day simple moving average (SMA) Thursday, with little meaningful follow-through on Friday.

06 20 11 spx Has the Market Put in a Bottom?

See full-size chart[3]

The Russell 2000 looks similar, although so far has technically displayed a better potential bottom-forming process. It, too, however needs clear upside confirmation in order for me to take any of this marginally positive candlestick action serious.

06 20 11 rut Has the Market Put in a Bottom?

See full size chart[4]

Sector-wise, energy and technology were the two losers for the day on Friday. Due in part to Apple (NASDAQ: AAPL[5]), which has a 12.25% weighting in the Technology Select Sector SPDR (NYSE: XLK[6]), the XLK has now closed below its March lows. Apple, for its part, is looking weaker with each passing day, and on Friday, it slipped another 1.51%, closing below the 200-day SMA, lateral support and just barely below a longer-term uptrend. For XLK, the next more meaningful support comes in the area of $23.70 to $23.80.

06 20 11 technology sector1 Has the Market Put in a Bottom?

See full-size chart[7]

The financials, via the Financial Select Sector SPDR (NYSE: XLF[8]) are still holding the lows of the long doji candle from June 10. Any bullish moves here should not be taken serious until we get a clear daily close above the highs from June 14. A break and daily close below the low of June 10 would indicate lower prices ahead. Individual banks such as JPMorgan Chase (NYSE: JPM[9]) are, not surprisingly, showing similar price movements.

06 20 11 xlf Has the Market Put in a Bottom?

Goldman Sachs (NYSE: GS[10]), for example, has created a wedge-like pattern over recent weeks that, if broken in either direction, would be telling.

06 20 11 gs Has the Market Put in a Bottom?

See full-size chart[11]

The main correlation to watch remains the U.S. dollar. A rising dollar typically equals falling equity prices and vice versa. To get a feel for the importance of the movements in the dollar as it relates to stocks, see the chart below. It shows the price movements of the SPDR S&P 500 (NYSE: SPY[12]) versus the PowerShares DB US Dollar Index Bullish Fund (NYSE: UUP[13]). (The correlation is even more extreme if one were to look at an intraday chart of the SPX versus the EUR/USD).

06 20 11 dollar vs equities Has the Market Put in a Bottom?

See full-size chart[14]

Some positive signs are surfacing in terms of potential bottom building on select indices and stocks. Sentiment also seems to be moving toward extreme negative readings. The week before last, the CBOE put/call ratio had the biggest one-day rally since the end of 2008, and the AAII moved to the lowest levels since summer 2010. As we discussed in Friday’s Daily Market Outlook[15], the VIX has finally sparked higher, also something for the positive column.

The main piece remaining for a tradable bottom bounce is upside confirmation in the broader indices and high beta stocks. My preferred scenario, however, would be a one-day wash-out and sharp rally back up, followed by a good green follow-through day. On the back of that pattern I believe much better risk/reward trades to the long side will set up again.

For one stock that has more downside ahead of it, see the Trade of the Day[16].

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[17].

For a list of this week’s economic reports due out, click here[18].

Endnotes:
  1. The Steady Trader: http://thesteadytrader.com/
  2. See full-size chart: http://investorplace.com/wp-content/uploads/2011/06/06-20-11-spx-weekly.png
  3. See full-size chart: http://investorplace.com/wp-content/uploads/2011/06/06-20-11-spx1.png
  4. See full size chart: http://investorplace.com/wp-content/uploads/2011/06/06-20-11-rut.gif
  5. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  6. XLK: http://studio-5.financialcontent.com/investplace/quote?Symbol=XLK
  7. See full-size chart: http://investorplace.com/wp-content/uploads/2011/06/06-20-11-technology-sector.png
  8. XLF: http://studio-5.financialcontent.com/investplace/quote?Symbol=XLF
  9. JPM: http://studio-5.financialcontent.com/investplace/quote?Symbol=JPM
  10. GS: http://studio-5.financialcontent.com/investplace/quote?Symbol=GS
  11. See full-size chart: http://investorplace.com/wp-content/uploads/2011/06/06-20-11-gs.png
  12. SPY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SPY
  13. UUP: http://studio-5.financialcontent.com/investplace/quote?Symbol=UUP
  14. See full-size chart: http://investorplace.com/wp-content/uploads/2011/06/06-20-11-dollar-vs-equities.png
  15. Daily Market Outlook: http://investorplace.com/45802/daily-stock-market-news-why-you-shouldnt-go-bottom-fishing-today/
  16. Trade of the Day: http://investorplace.com/46018/trade-of-the-day-buffalo-wild-wings-nasdaq-bwld/
  17. click here: http://online.wsj.com/mdc/public/page/markets_calendar.html?mod=topnav_2_3024
  18. click here: http://www.briefing.com/Investor/Public/Calendars/EconomicCalendar.htm

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