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.
As I discussed here before, June 1 had a good chance of making or breaking the market for the near term. After faking investors out with a month-end rally, June 1 proved to be the day that broke any bullish hope for the short term.
The chart below clearly displays the broken uptrend that was in place since in September. As often happens, strong trendlines get retested, which is what the Russell 2000 did in textbook fashion on May 31. And the successful retest and following failure gave short sellers more conviction.
In Friday morning’s Daily Market Outlook, I mentioned that the lack of a real wash-out day last week made it likely that we would test lower levels, which we did. Friday’s market action ended with the S&P 500 down 1.4% for the day, while the Russell 2000 dropped 1.65% (down 3.5% for the week). The most bearish visual remains the downward trajectory of stock prices and the lack of much fear in the options market as measured by the VIX, which at 18.86 remains in teenage territory.
The tape still feels heavy, and the financials’ late-day rally attempt doesn’t yet convince me that they have what it takes to lift the broader market. (Late Friday, CNBC broke news that the Fed is lowering the investment risk capital for major banks from 3% down to the 2%-2.5% area, giving banks a pop.)
In particular, the Russell 2000 landed very close to a major support area. The 770-780 area is now being tested for support for the fourth time in five months, and it also coincides with the 200-day moving average. But keep in mind that the more a support/resistance level gets tested, the weaker it gets. A bounce here is likely soon, but further downside can most certainly not be ruled out at this stage.
One chart I am watching closely for clues to the broader equity markets is oil, via the United States Oil Fund (NYSE: USO). The recent drop in oil prices may have a positive psychological impact on consumers as gasoline prices are again below $4 per gallon. But we must be careful what we wish for in terms of gasoline prices, as lower prices could also be indicative of lower demand, which was the case in 2008 — and we all know what that did to stock prices.
The USO is now 14.5% off its May highs, and it certainly doesn’t take much imagination to see a bearish flag developing here. Crude oil fell on Friday, after a report indicating that Saudi Arabia is increasing its output without a settled production change agreement from OPEC. Should USO fall out of this bearish wedge, I think $35.50 is in the cards.
In my opinion, it’s too early to go long and too late to short the broader equity market here for this latest leg down. I would like to see a wash-out day and a pop higher, or at least a consolidation period. If we get that, it would go a long way in getting more clarity on whether this latest correction will be short-lived or the beginning of a longer summer slump.
In terms of support on the charts, the Russell 2000 is close to its 200-day simple moving average, as is the S&P 500 and many of its sectors. We will take a closer look at this later in the week. Please remember to take things one day at a time and one trade at a time — base hits win the game.
For one former cult stock that is rising from the ashes of a burnout, see the Trade of the Day.
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.
