Market Update And Forecast

By: Dennis Leontyev | Tue, Jun 21, 2005
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Stock Market Direction

The expiration week saw choppy trading with a positive bias. Small and mid cap indexes dragged the market up, while NASDAQ under performed. Mid cap index is trading at the all time high; Russell 2000 is within striking distance of the all time high. Despite what seems like a lackluster advance for the DOW, volume began to expand and breadth remains very impressive. New High - New Low indicator is improving; summation index keeps rising; and there is very low down volume. All of the above suggests that S&P 500 will find a way to challenge this year's high in a not so distant future.

A lot of traders are expecting a correction only because the market hasn't had one in a while, but this is usually not enough to reverse a trend. There are several negative developments that might cause a pull back, but there is still lack of evidence that the advance is over. The first negative development is extremely low VIX, VXO and VXN readings. VXN is at the all-time low, which suggests complacency. Another negative is the fact that NASDAQ, which led the rally from the April lows, is starting to lag. A combination of NASDAQ's underperformance and low implied volatility will probably cap the rally during the coming week, but the positives mentioned above are expected to provide support. More choppy trading? Probably.

Right now I don't see a safe market timing trade, but a low volume correction might present a low risk long entry later this week. On the other hand, if the market rallies more on not so impressive internals, it may increase probability of an important top. Keep in mind, that oil is approaching $60, and even if doesn't have an economic effect on stocks, it will definitely put a lot of psychological pressure just like it did in early March.

VXN (NASDAQ volatility index), Daily:

The low points of NASDAQ volatility on the above chart occurred either right at tops or preceded important tops for NASDAQ. This is a warning sign, but not a sell signal yet.
We are long NEM from 38.30. Let's move the stop to 38.40 to lock in some profit. The profit objective is 41.80.

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Dennis Leontyev

Author: Dennis Leontyev

Dennis Leontyev

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