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May - In Like a Lion, Out Like a Lion

May was in like a lion, and out like a lion - stocks lost more than 8% for the month, which was the single worst month since the bull market began back in March of 2009. An omen of more trouble to come? There’s certainly not a lack of arguments to suggest that. On the other hand, gloom and doom headlines sell better…. let’s not jump to conclusions based on fear-mongers’ rants. Instead, let’s look at the trend, and what the actual undertow looks like (as opposed to just looking at the evidence that supports our opinion).

S&P 500

Don’t read too much into Friday’s decent-sized pullback. Volume was very light, and besides, though the S&P 500 was off 1.24%, a bit of a pushback could have been expected after Thursday’s 3.3% rally. That said, Thursday’s rally was a light-volume rally as well, so it doesn’t really indicate a majority opinion either.

In other words, we’re still in limbo-land….. enjoying the fact that Tuesday’s hammer bar (a reversal/bottom clue) is still intact, but legitimately concerned that we’ve not actually made any meaningful progress since Tuesday.

In the meantime, a big line in the sand has appeared - the 200 day moving average line (black) at 1104.9. That’s where the SPX was halted on Thursday, and where it was capped on Friday before the big pullback. Given its historical - and recent - importance that’s our make-or-break-point for the S&P 500.

In defense of the bullish argument, the VIX hasn’t given us any indication that it’s trying to move higher again. If the VIX can move under 29.25 at the same time the SPX moves above the 200-day average, that should be good enough to rekindle the uptrend. Anything less, and the rally is questionable.

S&P 500

S&P 500 - 05/31/10

S&P 500 - 05/31/10

NASDAQ Composite

Just for a little extra perspective this week, we’re going to throw in a quick look at the NASDAQ so we can identify a few more make or break hints.

As you can see, the composite is back above its 200-day average line, back inside its Bollinger bands, and almost back above an intermediate-term support line (blue). Any healthy move to 2269 or higher, and the bulls’ life will be much easier. If the VXN can move under 29.93 (where it’s found a floor over the last three days), that’ll help too.

Until one or both of those things happens though, it’s all in question. In fact, the NASDAQ’s line in the sand offers a much more defined bearish hint…. a move back to 2227 or lower. That’s where the 200 day line as well as the lower Bollinger band line are now.

NASDAQ Composite

NASDAQ - 05/31/10

NASDAQ - 05/31/10

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More Stories By James Brumley

James Brumley is a freelance writer and registered investment advisor. He began his career as a broker with a major Wall Street firm, where fundamentals and long-term holding periods were core strategies. After that, he switched gears completely, becoming an analyst at a short-term trading newsletter that focused on technical analysis. He now manages client money using the best of both philosophies. His company, Bluegrass Portfolio Management, offers investors an opportunity to reap superior returns with minimized risk.