Stock Market Analysis

Wednesday, May 01, 2013

Beginning of the Intermediate Correction...

The Dow took a huge 138 points hit today as economic data continued to worsen.

In continuation of the trend of worsening economic data, both the PMI and ISM turned in worse than expected today, leading to a huge sell off. PMI was significantly lower than last month and ISM posted its second straight down month, pushing it ever closer to the 50.0 line. These led to a decidedly negative sentiment in the market right off the bat. The Feds also failed to do anything to change the situation... in fact, they did nothing at all. Investors rushed back into the safety of bonds while options traders continued to keep total equities put call ratio around par in a vote for uncertainty. All of these are coinciding nicely with the arrival of the month of May when investors typically "Sell in May and Go Away" after a good first quarter of the year.

As expected, the Dow never beat the April high and therefore erased the bullish continuation pattern, forming instead the dreaded double top formation. Such a clean double top is extremely dangerous at the top of an extended rally and particularly so with so many fundamental reasons behind it. However, the Dow needs to close below its 30MA in order to confirm the double top formation. With the final bit of strength around the 30MA, I won't be surprised to see the Dow hold up a small positive day tomorrow as some bargain hunters step in. However, such bargain hunting should not be able to hold out against the coming intermediate correction which should happen as soon as next week. This was exactly the same pattern as back in 2012 where a good first quarter run led into a strong intermediate correction in May, yes, the proverbial sell in May and go away. There is little doubt left that this will be the exact same pattern this year.

For now, the Dow remains in short term neutral trend within an intermediate and primary bull trend.


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