Market Remains In A Correction; Day Count Reset


Wednesday, May 19, 2010
Market Commentary:

U.S. stocks fell even as the euro rallied after investors digested a slew of economic data. Volume totals were reported higher on the Nasdaq and the NYSE compared to Tuesday’s total which was not an encouraging sign. Decliners trumped advancers by over a 3-to-1 ratio on the NYSE and the Nasdaq exchange. New 52-week lows outnumbered new 52-week highs on both major exchanges. There were only 3 high-ranked companies from the Leaders List that made a new 52-week high and appeared on the BreakOuts Page, lower than the 15 issues that appeared on the prior session.

Important Fundamental Headlines:

Stocks closed lower as investors reacted to Germany’s surprise announcement on Tuesday to ban naked short selling in certain markets and a lower-than-expected report on consumer prices was released.  The US consumer price index fell short of expectations which helped allay inflation woes. Elsewhere, the Mortage Bankers Association (MBA) said foreclosure surged to a new record in the first quarter as uncomfortably high unemployment rates caused homebuyers to fall behind on monthly payments. The report also showed that residential foreclosures jumped to +4.63% from +4.58% in the fourth quarter of 2009. Shortly after 2:00pm EST, the minutes of the Federal Reserve’s latest meeting were released. Fed officials said they were not in a rush to sell $1.1 trillion of mortgage-backed securities, with a majority of policy makers wanting to wait until they begin raising interest rates before unloading their positions. 

Market Action- In A Correction, Day Count Reset:

All the major averages sliced below their recent lows which means the day count is reset and we are now looking for Day 1 of a new rally attempt to occur.  At this point, the 200 DMA line (i.e. 40 week-moving average) remains support for all the major averages while the 50 DMA line is resistance. If the 200 DMA line is breached, on a closing basis, then odds favor lower prices will follow. The converse is also true. Until either event occurs, we should expect this sideways action (between the 50 & 200 DMA line) to continue. What does all of this mean for investors? Simple, the market remains in a correction which reiterates the importance of adopting a strong defense stance until a new rally is confirmed. Trade accordingly.

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