Volatility To Fall As Market Bases

Wednesday, May 20, 2009

After putting in a low on March 6th the market rebounded with speed. Within a week and a half the market was nearly 20% higher. Momentum soon slowed and stocks entered a rising channel and have trekked higher ever since within the confines of the channel. Buyers have continued to step in on pull-ins while sellers step into rallies. Overall, the bid remains extraordinarily strong and a retest of lows looks highly improbable.

Yet, the 200-day moving average intersecting around 940 and the approaching 1,000 resistance level are likely to stall the rally. Stocks will not rise in a straight line and the 1,000 level will trigger technical selling and will act as a difficult psychological barrier. This level, coupled with a falling value for the VIX, leads me to believe the market may begin basing between roughly 850 and 1,000 throughout the summer months to consolidate the move off lows. As fear overwhelmed at the beginning of 2009 stocks saw continued selling with valuations hitting seldom seen levels. Perception shifted though and stocks rallied in expecation of improving economic conditions. This pause now will allow the actual future economic conditions to catch up to the recent repricing for more optimistic scenarios.

If this plays out as expected, active traders will see lower volatility and, in turn, less edge. The summer months may be great times for vacation.


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