— by George Leong, B. Comm.
I’m concerned about the state of the stock markets at this point. Markets are trading at a crux and, based on the recent action of the past week, there could be more downside moves and intraday volatility in the near term. On Monday, the DOW recorded its third triple-digit loss in the past six sessions and the fifth decline in six days. Market breadth is negative and investor sentiment is wavering.
Given the recent downtrend, the DOW is below a key breakout point of 8,400 and the S&P 500 breached 900. Technology is the focus of selling, with the NASDAQ below 1,800, which is not a surprise given its strength in 2009. In our view, it is clear that profit-taking has set in and traders are looking at absorbing some of the gains made over the past three months. You may also want to take some profits if you have not already done so. The key is to protect your gains with stops and profit-taking.
In the near term, watch the key breakout levels and moving averages. As I indicated on Monday, there are some key levels to monitor over the next few days or weeks. The DOW is below both its 20-day and 200-day moving averages. The NASDAQ is hovering just south of its 20-day moving average. Watch to see if the 50-day moving average at 1,729 holds. The S&P 500 is below its 20-day moving average and just broke below its 200-day moving average of 906. On the small-cap side, the Russell 2000 is back below 500 for the first time since May 29. The index is below its 20-day moving average, but look for support at the 200-day moving average of 495. Along with the breakout kevels, there are key levels to watch going forward.
Unless we see some oversold buying surface, the near term does not look good. In addition, the option volatility readings have been rising, a sign of increasing volatility.
It is clear that traders are mixed on the global economies. Much of the rally was based on the recovery in China and its insatiable appetite for commodities coming back. China is expected to steadily grow; but, based on the country’s trade, there is continued slowing in both imports and exports that had helped to build the country’s economy. For the rally to continue and any chance for sustainable gains, we need to see concrete recovery in not only China, but also the economies of the G7 countries. A dismal report on Monday from the influential World Bank downgraded global GDP growth and called for contraction of 2.9% this year, which is a major concern.
Oil is trading lower at $67.00 a barrel, as we move to the August contract. Look for oil to trade in a range and sell on rallies. Oil has been rallying based on economic renewal. I expect that oil will hold at the $60.00 level in the near term. This will be good for gasoline prices as we head into the busy summer driving season.
Bottom line: watch how stocks trade over the next few days and weeks. What you want to see is the avoidance of a major sell-off of five percent or more.