Editor’s note: Serge Berger, the head trader and investment strategist for The Steady Trader, will be providing the Daily Market Outlook until Sam Collins returns on June 27.
While yesterday’s rally was more convincing than the one we saw Thursday, it still leaves something to be desired. The energy sector, which led Monday’s tape lower, was the leader yesterday, and financials, which outperformed to the upside on Monday, lagged yesterday.
The question I find myself asking is whether the banks were trying to tell us something yesterday. Yes, the Financial Select Sector SPDR (NYSE: XLF) is back above the crucial $15 area, but passion lacked as JPMorgan Chase (NYSE: JPM), Citigroup (NYSE: C), Goldman Sachs Group (NYSE: GS), and other financials closed the day in the red.
Relatively speaking, I find the action in the Russell 2000 (RUT) small-cap index to be more constructive than that of the S&P 500 (SPX). The RUT undercut its March lows, traded closer to its 200-day simple moving average (SMA) on Monday, and yesterday, rallied back above the highs from Friday.
The potentially easy trade here would be to fade (sell short) a retest of the S&P 500’s $1,300/$1,295 level from underneath. Given the support level near $1,295 on the way down, one would expect some sort of resistance near that zone should we bump up against it again. Notice the resistance zone in gray on the chart below. The actual resistance area could be anywhere from $1,295 to as high as $1,310.
The SPX yesterday completed a morning star candlestick formation, much like what I discussed in the Trade of the Day with Home Depot (NYSE: HD). This three-day formation shows a fairly violent sell-off at the bottom of a trend, followed by an indecision day, and at last, a strong rally on the last day. Sellers lost their strength, and after an indecision day, buyers took the chance to step up.
The morning star formation here in the SPX is not as strong as the one in Home Depot, but it is a morning star formation nevertheless. As such, very aggressive traders could potentially buy here with stops at Monday’s lows and a profit target near $1,300. I’m not advocating this trade, but rather simply pointing out a near-term pattern that could lead us into better resistance above. Perhaps even more importantly for most investors is that, should we break Monday’s lows, we would essentially break a bullish candlestick formation, opening the trap to lower prices and perhaps even a washout.
More broadly speaking, however, the five-week correction we’ve witnessed thus far from the May 2 highs, remains short in duration when compared with other more meaningful stock market corrections. Additionally, given the S&P 500’s lack of serious respect for its 200-day SMA, one would expect it to be broken to the downside, if for no other reason than to trigger stops of weak longs in the market.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
