Stock Market Update: Upside Moves May Not Be Sustainable

Aug. 25, 2011 - PRLog -- It’s time to rejoice; stocks have gained for two straight days! Of course, I’m kidding. The bounce has largely been due to technically oversold buying as traders try to determine whether gains are sustainable or if it is a “dead cat bounce” in a developing bear market.

My thoughts are that the upside moves in the stock market will be met with increased selling resistance and, unless there is a major catalyst and less risk, the upside gains will be limited.

The reality is that the economy here with weak jobs and housing remains an issue. There is a lot of pressure on the Federal Reserve to introduce another stimulus plan. The Fed will need to do a Q3 to help us avoid a recession.

We also have the global risk factors.

Japan’s credit rating was downgraded to Aa3 from Aa2 by Moody’s.

Over in Europe, Greece expects its recession to worsen. This cannot be good for Europe. The situation in Europe remains focused on the debt and growth, along with the funding. And, until it calms down in Europe, markets will likely continue to be shaky on this side of the Atlantic.

The market sentiment continues to be extremely bearish, with a pick-up in the number of new 52-week lows. Over the last four sessions to Tuesday, there have been a combined 19 new highs and 750 new lows on the NYSE. Sentiment readings for the NASDAQ are similar.  

The overall market is trending lower. As of August 23, only 7.12% of all U.S.-listed stocks were above their respective 50-day moving average (MA), well down from 57.89% a month earlier. About 15.36% of U.S. stocks were above their respective 200-day MA, compared to 59.77% a month ago. These are not good metrics and indicate a stock market in trouble.

The near-term technical view remains bearish, as the key indices trade well below their respective 50-day MA and 20-day MA on relatively weak Relative Strength.

The NASDAQ, S&P 500, and Russell 2000 continue to display a bearish “death cross” on their respective charts, an indication of potential additional losses.

The S&P 500 rallied above its critical level of 1,132, but this may be temporary.

I continue to sense that gains will not be sustainable. The volume was average on the bounce on Tuesday, but well below what we saw during the down days. This indicates a lack of buying support. And, until there is firm buying and a base formation, it may be worthwhile to buy after a big dip and sell on a bounce. In other words, trade the current volatility.

Gold and silver continue to be the places to have money, especially the miners that have trailed the superlative upside move in gold towards $1,900.

On the chart, the October Gold surged to a record $1,896.50 on Monday and may be set to break $1,900. Contracts further out have traded at over $1,900.

The October Gold is bullish on strong Relative Strength. There is a Golden Cross on the chart with the 50-day MA of $1,614 well above the 200-day MA of $1,476. I feel that gold prices will continue to edge higher, especially if the U.S. economy falters and another recession surfaces.

My advice to you is to buy a mixture of exploration-stage gold miners along with small to large gold producers. Under this scenario, you can play both the potential aggressive gains of exploration stocks and the steady returns of the large gold producers.

As far as the overall stock market goes, the best strategy for risk-averse traders is to protect via put options.

Again, you may want to be careful when buying on the current weakness. To be safe, stay on the sidelines.

Be cautious and remember that maintaining your capital will allow you to trade longer-term.

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