“MAYDAY” MAY and “JUBILANT” JUNE:

A mere two and a half weeks ago I wrote an article entitled “Mayday: Mayday: Mayday” in which I described the wild market ride from May 4 through May 7 that saw the markets explode on the downside. After that wild ride the markets rebounded the following week only to sell off again before ending the month on a slightly more positive run. There certainly are no superlatives that can be applied to the trading we witnessed throughout the month of May. We marvelled at the “flash-crash”, followed by a 400 day rally, then by a more controlled sell-off and then the last 5 days of the month rising 380 points. Even the 122 point drop on Friday was a mere exclamation point to end the week and month.

The S&P 500 Index (SPX) dropped 8.2%, to mark the worst monthly return since the 11% drop in February 2009. It was also the worst May for the Dow since 1940. Amazingly we went through the entire month without two straight up days.

Checking the accompanying chart we see that the S&P 500 broke down through the 200 day moving average [BLUE line] just 7 trading days ago, a level it had traded above since way back in July of 2009. Although this is usually a bearish signal, I think that the move back through the 200 day MA lies just ahead.

I believe we are seeing many signs that a relief rally through June is imminent. I further believe that we are now in a consolidation phase in the market with the S&P 500 having support at the 1050 level and first resistance at 1,125 [RED line]. A concentrated upward run breaking through the 1,125 level will signal that the worst is over and a run up to the 1,200 level can not be far behind.

However strong my beliefs in this assessment, it is vital that I remind you that it is never prudent to attempt to fight the market. It will do what it wants to do, and trying to defend your market position won’t matter.

And always use “stop loss” orders to minimize losses and protect capital.