FYI | Jun 23 2010
By BTIG market strategist Mike O'Rourke
It started out as yet another fairly mild, slow trading session. Once again, late day weakness emerged and there was not much volume. Investor disinterest has taken hold and is fueling big moves but little action.
The fact that the S&P 500 Equal Weight and the Russell 2000 have underperformed the S&P500 by 90 basis points and 165 basis points, respectively, over the past 5 trading sessions indicates that P&L damage is likely more significant than the performance of major indices shows.
The headlines were mixed and generally exerted little influence on the market. The Housing Data was weak, but the market did not start to sell off until 4 hours later. Energy names sold off to new lows after a Federal Judge lifted the White House's moratorium. Even the Euro was relatively well behaved, but today it proved no benefit to US Equities.
Lacking both liquidity and news, investors find themselves buckling in for a very bumpy ride with no stops to get off. The bottom line on both the buy and sell side is that there is no liquidity to access, so investors are better served by picking their levels and remaining disciplined.
The slow, sloppy and indecisive nature of this tape keeps the technical patterns in the forefront. The S&P500 again broke below its 200 day moving average amidst the weakness and quickly broke below its 1100 support level.
The most disconcerting aspect of all of today's technical action is the setup being created for a “potential” Head & Shoulders top (see Chart).
The pattern being formed is far from textbook. It lacks symmetry, or balance in the distance from the left shoulder to the head and from the head to the right shoulder. For an ideal symmetry, the right shoulder would occur in late July/early August. Instead, the pattern currently has a truncated right shoulder in both distance and height.
Although the pattern lacks textbook qualities, it is important to recognize that a Head & Shoulders top is potentially forming. The Neckline is the 1050 level, it would need to be broken to complete the pattern.
A traditional 6-12 month price target measurement if the neckline is broken would be 883. That is derived by subtracting the distance between the neckline and the head from the neckline itself. Since the pattern is not close to completing yet, we would not be betting on such a decline, but it is import to be cognizant and alert that the potential is out there.
The views expressed are O'Rourke's, not FNArena's (see our disclaimer).
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