Marketgoers: Prepare to Navigate Low, Choppy Waters

by Serge Berger | May 31, 2012 12:09 pm

Today marks the end of May, and with the first of June coinciding with “Jobs Report Friday,” things have the potential to get interesting.

While we’ve had a good amount of economic data points out this week, likely the most-watched print is out tomorrow morning: the May employment report. Meanwhile, we remain in an environment that is littered with headlines and rumors, any of which can quickly move major stock indices by 1% or more.

Monetary policy hawks and doves are all over the place with their forecasts and expectations, but the Federal Reserve and the European Central Bank continue to reiterate their supportive stands. That leaves equity bulls hopeful for more accomodative news, potentially announced at the June FOMC meeting (June 19-20).

U.S. equities are largely trading in a range. The range for the S&P 500 remains around 1,290-1,340, and any move outside that zone needs to be assessed the second it happens. Last week’s trading was choppy and really only playable for very quick hitters. For the summer months, I foresee continued choppiness — again best played in the very short term, as swing trades are subject to large overnight gaps on aforementioned rumors.

Almost always when the S&P 500 comes up toward its 200-day simple moving average (red line), it eventually touches it breaks above it — when it comes down toward its 200-day SMA, like it is now, it usually hits it or breaks below it.

Last week, the index got very close to the 200-day SMA …

Small-cap stocks (as measured by the Russell 2000) are consolidating their recent weakness just near the 200-day MA and have resistance near 785 — the neckline of the head-and-shoulders pattern in play, which works to 730. The trend likely will continue lower in time and take the RUT below the 200 SMA, but that could be a choppy ride — and again, in my opinion, best played in quick time frames unless one is comfortable with wide stops.

Many have asked me why I don’t think we have seen the lows in equities. The answer lies within the chart below. Most important bottoms show divergence of price and oscillators. Last week’s lows came coincided with the lows in oscillators … so no divergence. This is not to be overlooked.

I continue to think 1,340-1,360 or so might be where the oversold bounce ends, but I don’t have any skin on that trade at the very moment.

The semiconductors also continue to look weak, and with the SOX as a leading indicator trading below its 200-day SMA, it doesn’t spell much upside potential for stocks until that changes.

Over in Europe, equity indices hardly bounced last week and already are on their way lower again — “ain’t no sunshine when it rains.” See the chart of the Eurostoxx 50 index below:

In the world of credit and rates, note that the CDX investment-grade credit index has risen 30% since the equity top in April (see chart below). In other news, German two-year notes are yielding nothing (literally), quite possibly making the U.S. two-year note (at 26 basis points) “attractive.”

All in all, we remain in a risk-off environment that has many bulls who were loudest in the spring rethinking their strategy. I suggest seeing things for what they are, rather than what you wish for.

Pick your spots and always use stops.

Serge Berger is the head trader and investment strategist for The Steady Trader[1]. Sign up for his free weekly newsletter[2].

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