The Fred Report - Mid Week Update May 4, 2011

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The FRED Report – Financial Research, Education & Data

Mid Week Update

Volume 3, Issue 36

May 4, 2011

Download PDF Version here

Update of Market View

So far things are going as planned this week.  The overbought readings on the daily FPO have lead to an immediate decline. The question for us now is – can this continue for a decent decline into the end of May or is this just about it? The daily FPO on SPY has come from +11 to +1, which may be enough theoretically to make a short-term bottom. Also in favor of this interpretation is that the SPY tested close to the move above 135, intraday low was $135.04 yesterday, and has held. 
We think this last is less significant, as IWM and MDY are below their support, and these indexes have been the market leaders. However, we continue to think there is a bit more downside as weekly and monthly indicators need to correct as well. The technical formation is quite clear, and gives us an excellent benchmark. It is a type of key reversal known as a “Cambridge Hook”. What this essentially means is that if we close above the highs of Monday May 2, we are very likely wrong about a significant correction, at least immediately. Should that occur, we would start to add the cash we have been sitting on to the strongest sectors. In this vein we note that XLP was positive Tuesday, while IYW was negative. Yet, people continue to advocate the Tech sector.
Obviously, we are almost alone in looking for an immediate decline. This makes us both comfortable and uncomfortable. It is certainly possible we will be wrong here, although obviously we don’t think we are. Also, remember that a key part of our forecast is that a strong second half to 2011 is part of our forecast, and we want to keep our eyes on the ball in this regard – do not get wedded to the short side here.

  

We show weekly charts of the DBC, and SLV, and note that the stochastics on both are still quite overbought, in spite of recent corrective action. While we remain intermediate-term bullish on commodities, a sharp drop into May is certainly possible, based on the weekly indicators.