Stocks ended the week, month, and quarter, with an explosive four-day buying spree.  But despite the gain of over 4% for the week, the S&P 500 closed out the second quarter with a fractional loss.  However, the Dow Jones Industrial Average which was the focus of much of the quarter’s buying rose 0.8%.  The volume on the NYSE improved yesterday to just under 1 billion shares with advancers over decliners by about 2.5-to-1 on both the Big Board and Nasdaq.

The “500” showed remarkable strength this week, but despite the last-minute rush to buy stocks, the market is still not “out of the woods.”  In this chart we see that “the woods” is the thick zone of resistance that starts at the 50-day moving average and the red dash downtrend line above it to the high of the year at over 1,360.  And the Relative Strength Index (RSI) at the bottom of the chart indicates that its “channel down” is still intact.

Our internal indicators (stochastic,  MACD, and momentum) are overbought and the Relative Strength Indicator (RSI) is trading at the top of its channel downtrend line.  The sentiment indicators, chiefly AAII and the CBOE Volatility Index (VIX), are complacently bullish with the VIX, at 16.52, near the bottom of its range.  Note that the last time we had a reading under 17 was at the May high and before that at the high of the year in April.  The AAII Sentiment Survey bullish sentiment increased for the fourth week in a row and is now at 38.31%.  This contra-indicator is flashing a strong near-term overbought number.

Conclusion:  After a very strong round of low-volume buying, the major indices have turned from near-term down and intermediate-term down to near-term up and intermediate-term neutral.  The early June breakdown that drove the “500” to the major support zone of 1,250 to 1,260 has been neutralized.  But the low-hanging fruit is ripe and traders are advised to take profits and await a better price opportunity which could come in mid-July.

The financial press generally attributed this week’s gains to a crescendo of QE2 buying by the Fed which terminated that program, the agreement by the Greek parliament to accept the EU’s austerity measures, and higher-than-expected corporate earnings for Q3 and Q4.

On Wednesday I noted that “Institutions are prone to put money to work toward the end of the month as ‘window dressing’ and in anticipation of a normal flow of funds early the following month.”  A chart was included illustrating that rallies often occur late in the month.   I’ve reworked the chart to illustrate that not only should traders consider taking profits late in the month, but they should be attune to new positions around the middle of the month.  Admittedly this is a crude study devoid of statistical backing.  But the visual evidence of the last eight months indicates that trades in the Dow could have been profitable in 7 of the 8 months if a buy was initiated at mid-month (green arrows) and liquidated at the end of the month (red arrows).

Obviously no one is going to blindly enter orders based on the exact mid-point of a month, but traders should be more alert to buying opportunities that appear around then since institutions tend to be more active buyers at month end and the end of a quarter.

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