DOW and S&P 500: Monday, May 24, 2010
It only took two weeks for the markets to revisit the lows set on the “flash” crash of May 6. After a quick bounce, the markets entered a free fall this past week culminating in a gap- down near the crash levels on Friday morning. However, the markets rebounded sharply and finished well in the green.
With this strong bounce off this week’s low, it appears bulls have been granted at least a short-term reprieve. Traders need to remain cautious however, as the past few days of selling have left a lot of shares in the hands of short term buyers, which will be anxious to sell on any strength.
The S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF, you can see how sharp the recent decline has been, with several large red candles forming with high volume. The key question for traders will be whether Friday’s bounce will lead to another rally attempt. SPY quickly became oversold and is quite extended from its 20- and 50-day moving averages. If SPY does attempt to move higher from here, the $114-$115 level will be an area to watch for possible sellers. This was the early January high and an area of trading activity a few days ago.
The Diamonds Trust, Series 1 (NYSE:DIA) ETF, which tracks the Dow Jones Industrial Average, reacted similarly to SPY with a strong reaction after testing the May 6 “crash” lows. While the majority of last week was spent falling lower, DIA gave some hope to long investors with the positive close on Friday. There appears to be strong support near $98-$99 and this is a key level moving forward. A drop below that would surely have traders in a panic. Looking higher, the $107 area appears to be a possible area of overhead supply.
Many stocks are well under support levels and not looking healthy. Most stocks are oversold and could have a sharp bounce, but there will be many traders looking to cash in on stocks they have held through the recent weakness. This is what makes this environment dangerous, as traders will be tempted with sharp rally attempts only to be met with other traders who have been anxious to get out at better prices. The markets will need to consolidate much further before a healthy trend can emerge. Until then, traders should either trade on shorter time frames, or simply stand aside and wait for better opportunities.
