Will Oil Continue to Plummet
The market actually closed lower again yesterday. At this rate, the market may even close down for the week, which is an uncommon event. Volume also picked up yesterday, which given the weak close, portends more selling in the near term.
I think many TradeMaster readers know that I have been skeptical of this latest break-out, heck, I have been skeptical of any higher close since December. But the most recent rally off of 1250 just seemed phony. Earnings season, which continues through this week, has been great, but very few stocks are moving higher after the results. More importantly, volume was extremely low in April, which is bizarre.
While volume was low, we still needed to respect the bullish trend and higher price, but that certainly has not been the case this week. Additionally, the strong areas of the market have shown the most weakness in May. Over the past few months the small cap and energy areas of the market have been our leaders, but over the past few sessions both of those groups declined heavily. While the broad market has thus far held steady, leadership sectors are crumbling, which is not a good reaction so soon after earnings.
It is extremely easy to be bearish here. But I don’t think that’s the right move. While the market has fallen over the past few sessions, we must also consider it’s ascent during the prior two weeks. Additionally (and this has been my criticism against shorting stocks since August) the bears cannot take out a support level. To my recollection, the bears have taken out two support levels since the rally began last year, both of which were this year during the February retreat.
I think the market is as close to a major top now, than it’s been since 2008, but I can’t for the life of me go short term bearish until sellers can start taking out support zones on distribution days. The first support area is 1345, but that should be easy to take down, along with 1332, which should be mildly more difficult. The real price to take out is 4.5% lower near 1301 and that area will not go down easily.
The market really hasn’t gone anywhere since February. And at this point, the next big market direction is highly dependant on the dollar. While the dollar broke a major support zone a few weeks ago, there is news of major significance which promotes a short term bottom to the dollar with the potential for a larger rally.
While both UK and EU kept from more interest rate hikes today, the market expects both will increase rates next month. The UK still will likely do just that, but the language from the ECB and Trichet did not appear hawkish. Much like Ben Bernanke, the ECB acknowledged inflation, but only went onto say that they would monitor it closely.
The market wanted to hear words that indicated they would strongly defend against inflation. The euro should tank today, and fall back down near $1.44 over the next few weeks. Correspondingly, that decline would take the dollar back up to $75 resistance, which happens to be a level it needs to regain if it’s to rally further.
Commodities will hate a rise in the dollar, but in the short term most metals have fallen sharply. As such they will be less impacted by a rise from the greenback today, but oil, which I’m short, should get murdered. Stocks do not enjoy a rise in the dollar either, but until $75 is taken, typical equity investors have nothing to fear.
I do not expect a major decline in the market this week, but honestly very few stocks look appealing. Until the bears take out one support zone it will be difficult fore me to jump into shorts, but at the same time stocks that I consider to be strong fundamentally display signs of a top. I will continue to look for promising trades to the long side, but trade this week is reserved for aggressive traders only – everyone else should stay in cash or bump up your stops.
