Momentum Rider Trading: May 2012

Friday, May 18, 2012

Stock Market Caution Alert

Stock Market Update Caution Alert

Gold and silver bounced up today as we expected from being oversold and with some short covering. Hopefully they are putting in a bottom and base now. Natural gas sold off early but recovered and unleaded gasoline and WTI Crude Oil held steady. We are still looking for a bounce for gas and oil fairly soon as well.

As for the US markets, the DJIA was up almost 90 points in the futures last night and a good bounce seemed likely today. Unfortunately more scares of runs on European banks and poor US domestic data this morning gave the short sellers ammunition. The very oversold markets continued to move towards the support target we expected near 1,300 on the S&P 500 – just much faster than anticipated.

The problem now is that there are very few buyers willing to step in front of the cascade down. It has the earmarks of some panic selling from funds to avoid the big 6 week stock market losses that we had the last 2 years (May 1 to June 16).

The only positive as we indicated last night is that our oversold indicators are hitting the buy triggers that could start a short squeeze back up starting tomorrow. But the weekend is always dangerous to hold longs with this negative cycle in place.

Facebook’s IPO could help trigger some upside stock market momentum tomorrow but our S&P 500 forecast points to a move lower to the 1,285 to 1,275 area (1,279 is the 200 SMA and next strong support). That would complete the Head and Shoulders Pattern retrace that we have been showing on charts for several weeks. It may happen next week without any good European news – like guaranteed deposits in banks, etc.

We wish we had better news but the Eurozone is unraveling and there doesn’t seem to be any answer close at hand. It could get much worse from here so scaling back even more on your equity exposure on any bounce is recommended. Cash is always a good position until more certainty comes in.

STOCK MARKET CAUTION IS WARRANTED FOR NOW!

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Good luck in your trading and investing,

Keith Hugenberg

CEO Jalexa Trading Consultants, LLC

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Head and Shoulders Pattern | May Selling

Another Technical Analysis Lesson – Head and Shoulders Pattern

Note: Reprinted from April 25, 2012 - Wouldn't this be useful to know for your trading and investing? This forecast was dead on the money.

MR’s forecast of more market chop around the 50 SMA this week has played out so far. The criss-cross of the 50 SMA happened for the 10^th time today on the S&P 500 in 12 days. Our bias was bearish going into the week on Sunday night and Monday was down 185 Dow points near its low. Since then, it did bounce up off that low and actually finished back above its 20 and 50 SMA today after Apple’s blowout surprise earnings. And yes, the heavy selling in Apple Inc. going into earnings clearly had the analysts and many short sellers caught on the wrong side.

At this point, the three major US markets were able to recapture their key 50 SMAs as well as their most important breakout levels from the last 30 days. COMP at 3,029 (>3,000); S&P 500 at 1,390 (> 1,375); and DJIA at 13,090 (>13,000). However, the markets were on the brink of a big selloff and technical breakdown on Monday (see later chart). The only savior was Apple’s blowout earnings today which caused yet another short squeeze up for the markets.

The chart from Sunday’s newsletter is still valid even after today’s strong close at 1390.

Bullish Above 1400 and Bearish Below 1370

Technical Analysis – May Selling Could Be Coming Again with a Head and Shoulders Breakdown

The markets were on the brink of a big technical breakdown from a Head and Shoulder’s pattern (see graph below from Monday) but they survived with Apple’s help. We have outlined this pattern numerous times before and recently showed a bullish Inverse Head and Shoulders pattern that could be forming in gold and silver (Technical Analysis | Gold and Silver).

Taking a look at the graph below, the neckline was briefly breached on Monday but the market was able to recover back above it. If the neckline is eventually breached with volume and momentum, the lower target is a 6% drop down to 1283 on the S&P 500 (8% from here). The neckline is around the 1368 to 1371 level now.

A Confirmed Neckline Breakdown Is Probable for May

The reason for our bearish bias going into May has been made clear before in our recent newsletters. A breakdown could repeat again in May based on the last 2 years’ history in 2010 and 2011 as the charts show below. Here are the charts from the last 2 years for the 6 week period from late April to the middle part of June.

Big Selling in May and Early June 2010 (15% Loss)

Big Selling in May and Early June 2011 (8% Loss)

The institutions have been burned badly the last two years in May and will surely protect this time around on any hint that a downtrend is starting again. In fact, had Apple missed its earnings last night, there is no doubt the heavy selling would already be in full swing going into May.

The bottom line is that we continue to stress caution and recommend fewer equities here. There is an increased downside risk based on recent past history and the Head and Shoulders pattern shown above.

For now we will wait to post more of our HOT Stocks in the momentum stock investor series. For the power stock picks tonight, MR is going to select 10 shorts that could fall quickly if selling kicks in again and into May as history would predict.