This is the second time in the last five trading session where up volume and advancers swamped down volume and decliners. Normally this would have us chomping at the bullish bit, however with the associated volume being low we suspect this is more short covering than across the board buying.
As seen in the chart above the S&P 500 the index is trying to develop and oversold bounce. As we stated recently for that to materialize we need to see the index get above 1,100. Wednesday’s (6/2/2010) close at 1,098 places the index just below this level. Given the positive momentum from internals we believe a counter trend rally can continue up towards the 1,150 area (lower red line) once 1,100 is taken out. That said we ultimately believe prices need to correct towards lower levels such as 1,000 or 950 (orange lines) on the index.
Unless some major upside volume comes in we believe the highs made on May 5th near 1,219 are the high price in the index for quite some time. However we know internals are always changing thus our forecast can and will change if necessary. For now however we view rallies as opportunities to trade and not marry positions. Additionally these rallies should be used to unwind yourself from any bad (underwater) positions. We expect the tape to remain prone to periods of volatility and the index to trade in a wide range.