Fed Swings Markets | Overbought Markets Short Term
The week started out as MR forecasted with early strength after the pro-Euro Greek elections, the potential for pro-market Fed minutes, and some technical strength from a 3rd wave up move (see S&P 500 Chart). The market hit some strong resistance and paused right below the 100 SMA at 1,358 and above the 50 SMA at 1,347 to close at 1,355.
The market is in a Wave 3 move up from 1,267 after the strong 5 wave move down from the 1,422 top. It is in the middle of a choppy trading range area between 1,300 and 1,400.
The 1,358 price area (100 SMA) is what MR predicted Sunday night before a pause and a highly probable pullback after such a strong run up.
Technical Analysis: Market is Overbought Short Term – Pause or Pullback Next
The market is very overbought in the short term and it needs to relieve the overbought condition. Refer to the T2106 McClellan Oscillator chart below to see how overbought the market is in the short term. On the bullish side, the T2110 chart indicates that an intermediate term oversold buy signal was triggered once the market pulls back some.
Technical Analysis: Short Term to Intermediate Term Trend Indicators
It has been a very good rebound after being very close to a dangerous bear market cliff below the 200 SMA and 1,300 just several weeks ago. However, no long term Euro solutions have been proposed or acted on and the G-20 meeting this week was yet another disappointment with nothing concrete happening.
As long as the hoarding of Long Term Treasuries continues at historic levels – a safety play, then the smart money seems to believe that more downside risk is still high. It is this fact that still makes us cautious about having too much high-beta (higher risk) equity exposure. Note how the TLT is higher now than even in late 2008 and early 2009.
Long Term Treasury Safety Investment Still Strong
Fed Meeting Swings the Markets:
As for the Fed meeting from today, the market originally sold off hard to the 50 SMA near 1,347 because the quick take was that future QE3 was not part of the Bernanke rhetoric or the minutes (already assumed). But after some investors dug into the actual minutes, there was a contingent that believed the Fed left the door open for QE3. Now MR could argue against the effectiveness and merits of implementing another QE program but that doesn’t matter. For some large institutions, they feel it would be bullish for the markets in the short term. That is why the market reversed late in the day to finish almost flat.
MR expects the rest of the week to be mostly down. There is a strong 50% Fibonacci support level at 1,344 which is just below the 50 SMA at 1,347. As long as the market stays above the 1,332 level and the 150 SMA, the uptrend rally could continue to work higher over time. However, we can’t rule out another test of the 200 SMA near 1,300 over the next few weeks or into July if the bears get momentum again.
Traders should remain nimble and can play select stocks on both sides of the market.
Power Stock Picks:
The strong drug and biotech stocks from June 17th still look good here. They could be bought if the market goes down and pulls a few of them down with it. (Reprint below)
Investor Notes:
MR recommends investors continue to remain cautious and lighter on riskier equities until early July or only after the longer term financial situation in Europe has more clarity. Until some of the longer term structural debt issues have been addressed with a detailed plan, the market still has a much bigger downside risk.
Gold and silver are still working higher in the short term. Oil is still trying to bottom and investors can scale in on any more weakness a little at a time.
The caution alert for retirement accounts and investors is still present and will remain for the foreseeable future.
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Good luck in your trading and investing,
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