- Technical Market Commentary -

May 26, 2010 (FinancialWire) (By Dr. Joe Duarte) (Go to http://www.financialwire.net/?s=cmmtry for all recent commentaries.) — The S & P 500 SPDR ETF (NYSE: SPY) has been charting a volatile course over the last two weeks, suggesting that more than one important dynamic is influencing the trading community.

Europe, North Korea, Washington, Iran, Iraq, Afghanistan, and life in general are getting difficult around the world, which is why it’s important to take a step back and try to filter out what the market is really trying to tell us.

The stock market, as measured by the S & P 500 has managed to rally at the close for two out of the last three trading days.  But each end of the day rally has been preceded by very aggressive selling, suggesting that the bulls and the bears are now fully engaged in trying to gain the upper hand and define the trend that will emerge over the next several weeks to months.   And to those of us who analyze and trade the markets the time in which the market is open is now divided between managing our exposure on the one hand, and marveling at the volatility that is now unfolding on a regular basis on the other.

Still, analysis should precede action. So here is what we’ve got:

The S & P 500 (SPX) is off nearly 12% from its intraday high on April 26th. That’s considered a correction.  Yet, the index is officially in what chartists define as an area in which a bear market is plausible, as it has fallen below its 200-day moving average, the traditional dividing line between bull and bear trends.

SPX is also below its 20 and 50-day moving averages, which define the short (20-day) and intermediate (50-day) trends.  The 20-day moving average has also crossed below the 50-day moving average, another negative technical development.  Yet, the index is clearly oversold, as is being proven by the fact that a nearly 300 point down day on 5-25 wasn’t able to deliver a new low at the close.

That means that there are both buyers and sellers. And it’s important to consider why each class of participant may be doing each particular thing.  The sellers, we suspect are those, at least partially, who are receiving margin calls. That means that some hedge funds may have made some big bets and are now under water.  They have to pay their bills and are using liquid assets such as stocks to raise capital.  The buyers seem to think that we’ve reached that crucial “blood in the streets” buying opportunity and are rushing in after sellers are starting to look exhausted.

The net effect is that at the end of the day, not much net movement may have actually taken place, but that short term traders who have been on the right side of the moves, both up and down, may be doing well in this environment.

Most individual investors lack the time and willingness to trade under these conditions, which means that they are either not paying attention, or paying so much attention that they are losing sleep.  It’s times like these which test all of us who analyze and trade the markets.

What’s the point? You’re probably not alone.  Professionals are just as stressed out as individual investors during these periods. The key is to stick to your trading plan and to define your entry and exit points before you pull the trigger on any trade or investment, during any market.

(Go to http://www.financialwire.net/?s=joe+duarte to see more commentaries by Dr. Joe Duarte.)

(Go to http://www.financialwire.net/2010/04/22/about-duarte/ for more about Dr. Duarte.)

(Go to http://www.financialwire.net/?s=cmmtry for all recent commentaries.)

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