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FirstAlert[tm] 6/17: Stock Market Flirts With Disaster

fa_logo_sq_225px-w_bwJune 17, 2009 (FinancialWire) (By Dr. Joe Duarte) — The S&P 500 SPDR (NYSE: SPY) and the Ishares S&P Small Cap 600 (NYSE: IJR) ETFs are showing signs of being under pressure, as the stock market may have started a long overdue correction.

The stock market has followed the technical analysis textbook since bottoming in March, and the most important trend following indicator so far has been the 20-day moving average for the S&P 500, as it has provided support for the market all the way up from the bottom, providing a launching pad toward higher prices five times before 6-12.

But, this time may be different, although it’s too early to tell just yet. The S&P 500 closed just below its 20-day moving average on 6-15 and moved further below the key line on 6-16. If this turns out like the previous five times that the index has successfully tested the support of the average since the March bottom, the S&P 500 will bounce off the line in the next 1-3 days, starting on 6-15 and move higher, perhaps to a new high. In this case, our short-term target, if the market rallies would be a move toward 1000 on the S&P 500.

But, this is not guaranteed, and it’s not at all an exact science, so it may take a little longer. The key ingredient to this puzzle is that the index holds at or near the 20-day moving average. Consider the fact that five times for something to happen is rarely a statistically significant sample. Yet, it’s rare for a support level, such as the 20-day moving average, to be this reliable this far into a move. So if we had to bet, we would bet that this time, the index is more likely to fail and to move lower toward the 890 area, where the 50-day moving average offers support that has only been tested once (April 1) since the market bottomed. Adding another layer to the issue is the fact that this is an options expiration week, and that Wednesdays of such weeks tend to be very volatile.

To be sure, at this point anything is possible. And if the market rallies from here, we’ll trade with the trend. Yet, this late in a rally, you have to be skeptical and raise the bar with your expectations. If the market once again behaves as it has the previous five times that it has during this rally, we should move higher by the end of the week and continue for the next couple of weeks at least. If it fails, as the action on 6-15 and 6-16 suggests that it might, then we would be in the midst of a short to intermediate term correction, which makes sense, given the fact that stocks have rallied for three months and that we are starting to get into the summer trading season, which is known for its low volume and mostly dull markets.

Staying patient here is the key to success.

The Investrend Economics Calendar lists Consumer Price Index (CPI) for May (8:30 a.m.), Current Account Deficit for Q1 (8:30 am E T), EIA Petroleum Inventories (10:30 a.m.), Fed Chairman Bernanke speaks at Wash. Conference.

The Investrend Events Calendar showcases ATR, JCI, OSK, ATU WJB Capital Group Milwaukee Industrial Bus Tour; MAT Analyst Conference; MDRX, BMRN, EBS, MHS at Jefferies & Co. Healthcare Conference; PVH, BGF at Barclays Capital Leveraged Finance Consumer Conference; WL, SNBC, AMSF, SFG at Fox-Pitt, Kelton Small & Mid-Cap Bank and Insurance Conference.

The Investrend Money Index is an indicator of the depth of market direction or indirection. While not always including the same stocks, the NYSE/NASDAQ 50 Most Actives indicate the direction in which the mass of money is flowing. Last session’s trading showed 11 advancers versus 39 decliners. There were no significant advancers. Decliners followed Matrixx Initiatives Inc. (NASDAQ: MTXX) down 69.96%, E*Trade Financial Corporation (NASDAQ: ETFC) down 8.84%, Sequenom, Inc. (NASDAQ: SQNM) down 8.52%.

Vote in the Investrend Poll Question of the Day at Investrend Information (http://www.investrendinformation.com).

Investrend Website of the Day: http://video.discovery.com

Quote of the Day: “Too many pieces of music finish too long after the end.” Igor Stravinski

Today is: Stewarts Root Beer Day.

Happy Birthday: Giovanni Paolo Pannini, William Hooper, John Robert Gregg, Igor Stravinsky, M. C. Escher, Ralph Bellamy, Red Foley, David “Stringbean” Akeman, Elroy ‘Crazylegs’ Hirsch, Newt Gingrich, Barry Manilow, Joe Piscopo, Thomas Haden Church, Greg Kinnear, Will Forte, Venus Williams.

Today in History: Sir Francis Drake claimed a land he called Nova Albion (modern California) for England in 1579. In the Kingdom of Hawaii, Kamehameha III issued the Edict of Toleration in 1839 which gave Roman Catholics the freedom to worship in the Hawaiian Islands. The Statue of Liberty arrived in 1885 in New York Harbor. The College Board introduced in 1901 its first standardized test, the forerunner to the SAT. In Kansas City, Missouri, in 1933, four FBI agents and captured fugitive Frank Nash were gunned down by gangsters attempting to free Nash. The last public guillotining in France was held in 1939. Iceland became a republic in 1944. The United States Supreme Court ruled in 1963 8 to 1 in Abington School District v. Schempp against allowing the reciting of Bible verses and the Lord’s Prayer in public schools. With the death of the last individual, the dusky seaside sparrow became extinct in 1987.

[FirstAlertTM was created by Gayle Essary, founder of Investrend Communications, Inc., parent of Investrend Information (http://www.investrendinformation.com). The opinions expressed in FirstAlertTM do not necessarily reflect the opinions of Investrend.]

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