Market Rally Stalling

Friday, May 22, 2009

After bouncing from the March 6th lows the market began channeling higher within a 60-point range for several months. Yet, this week of trading may have forecasted a change in trend. While the S&P ended slightly higher for the week, the end of the week's action showed significant selling pressure. The S&P put in a lower high on Wednesday and saw heavy distribution Thursday and Friday breaking the lower rising trendline. The S&P is currently flagging below the ascending trendline retesting the break. The failure into the close in Friday's trading confirms weakness in stocks, albeit on lower volume.

Ascending channels are useful technical patterns that highlight the pace of a rally as investors pick up shares on pull-ins and sell rallies at repeated distances in line with the overall sentiment. Typically, ascending channels have bearish implications on a downside break as psychology changes. A downside break of an ascending channel forecasts a move lower equivalent to the width of the channel. The current pattern is a 60-point channel with a break at 890. The pattern then calls for a pull-in to the 830 level which coincides with a 38.2% Fibonacci retracement.

In the longer term, even with this trade the markets will still favor a strong bullish propensity. I suspect that this trade will be a slow grind lower and will establish a defined trading range for the summer months. I do not see a retest of the bear market lows and I believe stocks may then range between 830 and 930 for several months as the VIX falls. Technically, a retracement of merely 38.2% manifests considerable strength. The break of the channel more or less shows that this recent rally is stalling and the market needs time to consolidate the move.


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