Monday, May 24, 2010

Weekly Outlook 5/24



This week the market should stabilize and volatility will probably contract as the SPX bounces back from very oversold conditions. We made it down to 1055 last Friday before closing near 1085. There are 3, count em, 3 upside gaps in the SPY that are unfilled. These gaps sit at SPY 111.76, 115.99, and 120.35. I think the first two  will likely fill on this next relief rally that should begin this week. The market acts like a magnet towards unfilled gaps in the SPX and it should be no different this time. I have an upside bias initially this week in the market and think the 1110 area is a first target of resistance. Above that I see the possibility of 1155 gap being filled.

The correction we have seen in the SPX has been about 13% so far and I think for the time being that is enough to get some value buyers out there and shorts to cover as the fear level got to a palpable level. The sentiment came from an overly bullish angle just a few weeks back to a very sharp reversal into bearish sentiment as the highest put/call ratios were recorded Thursday is some time. Also on Thursday the internals in the market were just about as negative as I've ever seen them. Out of 500 stocks in the SPX, only 3 of them were green. Down volume on the NYSE was 99%.

Going forward the SPX should establish a trading range as we enter the summer doldrums in June-July. This week is the last week of May and next Monday is a holiday so you will usually see reversals of trend during the week prior to a 3 day weekend in the markets. What sectors are best for an oversold bounce? Well, probably energy and materials based on their high betas alone and the potential rebound of the AUD and CAD dollars off support. Also tech stocks look decent for a bounce play this week and banks are overdue as well even though I am not a fan of financials overall.

Currencies- The EUR has stabilized and as long as it holds the 1.23 level it can start to retrace higher and maybe you see some shorts cover into the 1.27-1.28 zone. Like I said above the AUD and CAD dollars have gotten smashed recently as the risk trade came off and traders flock to the JPY. The AUD has a decent chance of bouncing higher this week back to the 0.85 level. Same deal with CAD as it should retrace back to 1.04-1.05 this week. The longer term weekly charts in these commodity currencies look a bit damaged (Aussie more so) and that tells me that they could be in for more downside into summer time and that should put more pressure on commodities like oil and copper. JPY is holding 90 and is due to bounce back to the 91-92 area as long as fear doesn't explode once again short term. The yen is a safe haven and that's why it had such a strong bid the last few weeks as people bought yen and sold EUR.

Commodities- As I mentioned the energy and materials sector is due for snapback rally and I think we will see that this week but going forward in the next few months this sector can see more weakness if the AUD stays under pressure. I think oil can bounce back to the mid 70s before seeing much resistance and copper can come back to 3.20. Gold has pulled back from its insanely overbought state last few weeks and met support at the 1175 area. I think gold quiets down for a while and should just consolidate for a few weeks.

Buy the dips>> BIDU, COP, AAPL, INTC, TBT, NFLX, CLF, AMCC, NTRI, MCD

Sell the rips>> AMZN, RIMM, SPG, POT, FLR, BEN