Another month has passed and expectations remain low thereby the bias remains bullish. Although the bias is bullish the Expectations Indicator has given us pause on taking any type of bullish stance when it signaled a likely pullback on 1/31/2013. The pullback did occur in the commodities market and currencies paired against the US dollar, but the stock market remains resilient.
“Choppy” would be the best way to describe the stock market over the past month. As discussed in the April 2013 Market Expectation Letter, the market appears to be exhibiting “bubble” characteristics with its uncanny ability to shrug off extremely bearish data points combined Wall Street’s thoughtless suggestions of buying equities purely on the basis of their under-performance to the rest of the market.
On April 23rd the Dow Jones Industrial Average lost 140 points in a matter of 2 minutes due to a hijacked Associated Press Twitter account that tweeted the White House had been bombed and the President was injured. The Tweet was only visible for 4 minutes. This extremely swift market response revealed the power of Wall Street’s black box automated trading systems the were originally created to take advantage of the volatility in the markets but now apparently are the primary driving force behind them.
In the April 2013 Market Expectation Letter “stay on the sidelines” position was taken. Today, with the choppy market momentum and the Wall Street robots in control we would continue to stand on the sidelines with a bias towards selling into the more likely then ever pullback.
It is important to understand that a pullback is when the bulls take profits and a sell off is where bulls take losses. So as long as expectations remain low we should expect any pullback to find support and resume higher.
If the pullback ensues we could look for support at some key levels on the DJIA (Dow Jones Industrial Average) specifically around (plus or minus 100 points) 13,800, 13,100, 12,700 or 12,000. The above support levels are not targets for the pullback but rather levels the market could find support and resume its bullish move higher.
At these levels we would look for the DJIA to find support and move higher and then attempt to retest that support level. If the retest fails to go through the support level, then the market would likely continue higher. If the retest breaks through the support level then the next lower listed support would be the target level where we would look for the same sequence of events to occur.
The above and below represents the opinion of the author and do not constitute a recommendation to buy or sell any financial products.
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