Dallas, TX
May 26, 2010, 08:00 EST		 Dr. Joe Duarte's Market I.Q.


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Intelligence, Market Timing, And Trading Strategy For Traders and Investors

Markets Are Trying To Bottom
What's Hot Today:

U.S. stock index futures were pointing to a higher open on Wednesday. The Euro was back above 1.23 on the dollar. European stocks also bounced.

News For Thought

Report: BP ignored warnings signs of trouble before Gulf well exploded. According to The Wall Street Journal: "Oil giant BP PLC told congressional investigators that a decision to continue work on an oil well in the Gulf of Mexico after a test warned that something was wrong may have been a "fundamental mistake," according to a memo released by two lawmakers Tuesday. The document describes a wide array of mistakes in the fateful final hours aboard the Deepwater Horizon—but the main revelation is that BP now says there was a clear warning sign of a "very large abnormality" in the well, but work proceeded anyway. The rig exploded about two hours later."

Spain raises taxes. According to Stratfor.com: 'Speaking at the control session in Congress, Spanish Prime Minister Jose Luis Rodriguez Zapatero announced that new higher taxes for high earners will be enforced in a few weeks, Typically Spanish reported May 26. Zapatero said the new tax would fall on “citizens with a high economic capacity.'

Presidential poll numbers continue to decline. According to Rasmussen Reports.com: "The Rasmussen Reports daily Presidential Tracking Poll for Tuesday shows that 24% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-four percent (44%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -20." What's more startling is this: "Overall, 42% of voters say they at least somewhat approve of the president's performance. That is the lowest level of approval yet measured for this president. Fifty-six percent (56%) now disapprove of his performance."

In fact, the disillusionment among voters seems to have come during Mr. Obama's watch. According to Rasmussen: "Most Americans have “come to believe that the political system is broken, that most politicians are corrupt, and that neither major political party has the answers,” observes Scott Rasmussen. Just 27% believe Congress knows what it’s doing when it comes to the economy and 41% say that a group of people randomly selected from the phone book would do a better job than the current Congress."

Markets Are Trying To Bottom
If This Is The Bottom.. We Should Know Within A Week
U.S. stocks look ready to bounce on Wednesday morning. Aside from an oversold bounce which is way overdue, the market seems to be responding, at least in some degree, to the notion that U.S. banking reform may not be as extreme as it was initially seen, and the fact that European nations seem to be making moves toward getting their financial house in order.

But it's not likely to be all clear sailing from here. That's why it’s important to take a step back and try to filter out what the market is really trying to tell us.



Chart Courtesy of StockCharts.com


The stock market, as measured by the S & P 500 has managed to rally at the close for two out of the last three trading days. But each end of the day rally has been preceded by very aggressive selling, suggesting that the bulls and the bears are now fully engaged in trying to gain the upper hand and define the trend that will emerge over the next several weeks to months. And to those of us who analyze and trade the markets the time in which the market is open is now divided between managing our exposure on the one hand, and marveling at the volatility that is now unfolding on a regular basis on the other.

In fact, the S & P 500 (SPX) is off nearly 12% from its intraday high on April 26th. That’s considered a correction. Yet, the index is officially in what chartists define as an area in which a bear market is plausible, as it has fallen below its 200-day moving average, the traditional dividing line between bull and bear trends.

SPX is also below its 20 and 50-day moving averages, which define the short (20-day) and intermediate (50-day) trends. The 20-day moving average has also crossed below the 50-day moving average, another negative technical development. Yet, the index is clearly oversold, as is being proven by the fact that a nearly 300 point down day on 5-25 wasn’t able to deliver a new low at the close.



Chart Courtesy of StockCharts.com


There are two other interesting indicators to consider. One is the NYSE advance decline line (NYAD, above) and the other is the number of stocks making new 52 week highs on the NYSE (NYHL, below). The AD line is still in a down trend, although one or two positive days of market breadth could begin to make a difference. The number of stocks making new 52 week highs on the NYSE has flattened, another sign that momentum in this market is to the down side, or at least has been to the down side over the last few weeks.



Chart Courtesy of StockCharts.com


That means that there are both buyers and sellers. And it’s important to consider why each class of participant may be doing each particular thing. The sellers, we suspect are those, at least partially, who are receiving margin calls. That means that some hedge funds may have made some big bets and are now under water. They have to pay their bills and are using liquid assets such as stocks to raise capital. The buyers seem to think that we’ve reached that crucial “blood in the streets” buying opportunity and are rushing in after sellers are starting to look exhausted.

The net effect is that at the end of the day, not much net movement may have actually taken place, but that short term traders who have been on the right side of the moves, both up and down, may be doing well in this environment. The real question is whether this market has made a bottom. And if so, is it a short term bottom or something more meaningful?

Conclusion

If this market has made a bottom, then we should start seeing signs of a sustainable rally within the next week or so.

Most individual investors lack the time and willingness to trade under these conditions, which means that they are either not paying attention, or paying so much attention that they are losing sleep. It’s times like these which test all of us who analyze and trade the markets.

A good decision point for this market is the S & P 500 and its relationship to its 200-day moving average, which is near the 1100 area as of the close on 5-25. If the index moves above this key chart point and gathers momentum, it's likely that the bottom has been put in.

What’s the point? You’re probably not alone. Professionals are just as stressed out as individual investors during these periods. The key is to stick to your trading plan and to define your entry and exit points before you pull the trigger on any trade or investment, during any market.

We'll be on Twitter some time today before the market closes with some updated comments.

Know when to sell and how to make money when the market falls. Get a detailed trading plan in your pocket. Read Dr. Duarte's All NEW Books "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for All Seasons. Also Available As Kindle Books.

 

Market Moves - Stock Of The Day
Short S & P 500 ETF (NYSE: SH) Could Reverse
Investors with money in the Short S & P 500 ETF (NYSE: SH) should pay special attention to this position in this market.



Chart Courtesy of StockCharts.com


Playing the short side of the market via the Short S & P 500 ETF (NYSE: SH) has been profitable over the last few weeks. The ETF moves up when the S & P 500 falls. And lately it has performed well.

The problem with selling the market short is that, unless you are in a true bear market, it is often little more than a short term trading opportunity. That means that positions in these ETFs should be watched more closely than most people, who are used to the long side of the market, are used to.

One thing to watch is volume. And over the last two trading days, there are two clues that this ETF could reverse in the short term. As the market has rallied on two of the last three days, this ETF has fallen in price. But volume has risen on the down days. That means that money is coming out, not going into the short side.

If there is a positive surprise, such as we saw yesterday, when Representative Barney Frank, of the House Financial Services committee, noted that he was less hawkish on derivatives and the banking system, the short side of the market will likely crumble.

You don't want nice profits to go away on a news item that changes the market's perception. In other words, it's often better to sell short selling ETFs earlier rather than later.

One way to stay out of trouble is to use sell stops and to ratchet them up as the ETF climbs in value. See our S & P section for more details on SH.

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