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Friday June 9, 2006
Dead Cat or Resumption of Bear?
For the first time since October 28, 2005 the S&P 500 closed below its 200-day moving average on Wednesday. This news, barely mentioned by a mainstream press absorbed in the global stock market sell-off story, is potentially important for one reason: key turning points are usually marked by solid breaks above or below 200-DMAs. Thanks to the power of hindsight, two such points can be clearly identified as important events in recent market history.
On the same day the S&P 500 closed below its 200 DMA the Dow came within 26-points of hitting its 200 DMA. This set up yesterday’s action, which was the most volatile trading session since the May 11 downtrend began.
Yesterday’s 306-point intraday trading range on the Dow was its largest daily trading range since March 24, 2003. Not surprisingly, the VIX highlighted this massive trading range by briefly shooting above 20 for the first time in more than 2-years. If this action doesn’t put traders on edge I am not sure what will.
But alas, offering hope that the brutal sell-off since May will pause, the Dow bounced with authority when it fell below its 200 DMA yesterday. Until further evidence of a slow down in either the US economy or corporate earnings arrives, hopes for a pause may be founded, although hopes for a soft landing in the US economy are likely to prove misplaced.
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