Monday, May 17, 2010

Weekly Outlook 5/17



This week the market is continuing to sell off as almost the entire gap up from last monday is given back. The gap I was looking for in the /ES sits at 1107.75 and we have come within 5 points of that this morning. The slide from 1172 last Thursday has been furious but there was also very little reason we were up last week at all. Oversold bounce and that was completed in three days. That is not bullish. And it looks like this selloff wants to go further than three days so the gap fill is the first target then the 1100 area is home to the 200 day ema which everyone will be expecting to hold. So I wouldn't be surprised if we break it for a day and then suck in a lot of bears and shorts just to see it bounce back up and create a short squeeze.

Things are not good and fear and volatility is reflecting that properly but still I believe we are entering a stretch of sideways trading that should last thru the summer. This could be a wide range though. Measures of risk are still pointing to more downside and the best measures out there have been the EUR/JPY and AUD/JPY as well as the dollar index. The flight to safety is continuing as all industrial commodities get thrown over the cliff. Copper is a leading indicator or the market and it has not stopped selling today which indicates the SPX is not close to bottoming.

Another problem is sentiment. The longer term sentiment has shifted in the public eye with the stock market. Retail Joe has lost trust in the mechanics of the market and the oil spill doesn't help. Just as the recovery was starting to become believable in the eyes of the middle class the market starts to care about the Euro problems. Longer term this doesn't favor terribly higher prices in the market later this year, if at all. Short term however the sentiment is stretching to the fear side as the VIX is at 34 and I would expect that to grind lower into the options expiration this week.

Currencies- It seems that everyone is talking EUR and even is short the EUR and when it feels like this then you gotta be prepared for a short covering rally. One problem. A country defaulting and riots in the streets overshadow that and can take a move much farther than you think. The EUR really doesnt have a lot of support below 1.23 until 1.18 and I would be surprised if we don't see some kind of stabilization at least this week. AUD and CAD look very weak as they have corrected with the price of commodities and show little signs of being ready to bounce yet. AUD has support at .8650 so I would look for that to hold this week.

Commodities- Copper is down 7% today alone and now trading at 2.92, well off the highs over 3.50. This could actually get down to the Feb low of 2.81 or lower if the industrial fears continue and China growth slows. Crude oil is down 20% from the high a few weeks ago and trading with a 69 handle this morning. This chart looks terrible and I think could even retrace to the mid 60s.

Buy the dips>> AKAM, COST, CREE

Sell the rips>> FCX, FSLR, WYNN, JOYG, CAT, CCJ, GOOG, HBC, RIMM