Investor Alert: Don’t Get Fooled by a Rally

Stocks are heading lower, the charts look ominous. While many of you may be looking to buy stocks right now, make sure you don't get pulled in by a sucker's rally.I hate to harp on this, but I continue to see some exhaustion on the charts and additional downside moves ahead of us, especially if the S&P 500 April low of 1,294 is not reached.

With the traditionally slower summer months ahead, I expect that trading will be flat from the already lackluster interest in stocks. My investment advice would be to be extra cautious.

Stocks have declined in six straight sessions to June 8 on a lack of any sector leadership. Financials are losing more ground on continued focus on restructuring the sector. Technology is weak, with the NASDAQ now up about one percent this year. The area that I continue to like is gold, as the August gold is holding above $1,530 and is bullish.

All four of the key indices are below their respective key 50-day moving averages (MAs)—a bearish sign. There’s some exhaustion on the charts and potentially more downside weakness.

Key chart developments include the S&P 500 trading lower, below its April low of 1,294. Failure to hold could drive the index to its 200-day MA of 1,245. The Russell 2000 is also below 800. The Russell 2000 is down about eight percent from its 2011 high, while the NASDAQ is down about seven percent. Technically, the picture looks moderately bearish in the near term on weak Relative Strength. Watch for buying support due to an oversold technical condition.

Stocks are clearly continuing to trend lower. About 56.35% of all U.S. stocks are above the 200-day MA, down from 78.89% a month ago. For the shorter-term moving averages, the monthly decline has been more significant. Only 17.80% of U.S. stocks are above their 20-day MA, down from 62.52% a month ago.

In all, the charts look ominous.

I’m nervous. The Federal Reserve is nervous. Fed Chairman Ben Bernanke said that the economy is slowing more than expected. Bernanke also failed to say anything about a third phase to the quantitative easing, even though the QE2 comes to an end in a few weeks. There is some optimism towards the second half, but there will be many hurdles to overcome, including jobs and housing.

The Beige Book indicated that four of the Federal Reserve’s 12 bank regions (New York, Philadelphia, Atlanta, and Chicago) slowed in April and May. The overall feeling from the report is some slowing of the U.S. economy, which is not unexpected.

Add in the colossal mess in Europe—in Greece—and you’ll understand my concerns.

And, while there is a desire to buy for many investors, be careful and wait until you if there is firm buying support before you jump in. We could see a sucker’s rally. It may be time to take a break.