Charts Look Bearish, But Shorting Here Could Be Risky

George Brooks |

Charts Look Bearish, But Shorting Here Contains RiskyInvestor’s first read      - Brooksie’s edge before the open

Wednesday, May 16, 2012        9:15 a.m. ET

DJIA:  12,632.00

S&P 500:   1330.66

Nasdaq Comp.: 2893.76

Russell 2000:  777.36

More “technical” damage was done yesterday, as two rally attempts during the day failed with a plunge at the close.

It looks like the market is headed lower, what can stop it?

For one, reading the next move in the market  has never been that easy. Just about the time it looks like the market is absolutely, without a doubt, going to move in an obvious direction, it does the opposite.

What I am saying is, don’t go short now, after a sharp rally, yes if  justified then, but there are risks in shorting now –  looks too easy.

I can see a drop to DJIA 12,275 (S&P 500: 1292), even DJIA 12,075 (S&P500: 1275), the technical pattern of the charts almost guarantee it, but not in a straight line.

What can stabilize prices, even prompt a rally?

Reassuring news out of  Greece would help, as would some improved numbers on the economy (see below). An improved outlook  for the economies in Europe and Asia, would also help. We get mixed messages there – one day  it is looking up, next day heading down.

St. Louis Fed president, James Bullard, speaks at12:30 and the minutes of the FOMC are released at 2:00 p.m.

Then too, unless money managers see a serious slide in stock prices, they can be expected to be buyers, perhaps not aggressively, but buyers in enough size to reverse the market for several weeks.

   These guys/gals compete for managed funds based on performance.  While a manager may look good sitting in treasuries for a while, the big numbers are put on the board through well-timed investments in common stocks.

The market is down some 6% in 11 trading days. It won’t take much to prompt some buying.

   One of the ways these managers  differ from most of us is they have a lot of money to invest. They can pick away at a position and average out their cost. With limited funds, most investors must be more precise in timing.  Unfair in a perfect world, but that is one reason why it is tough for the individual investor to make money in the market.

GREECE:

As a result of their meeting yesterday, German Chancellor Angela Merkel and newly elected French President Francois Hollande announced they would consider measures to promote economic growth in Greece in return for Greece’s pursuit of the austerity measures demanded by lenders in order to remain in the 17-member euro area  community.

Greek leaders will meet today in Athens to attempt to agree on an interim government, the risk of a run on Greece’s banks increases.

“As reported,” an exit from the euro would require banks to close for several months while a new currency was facilitated and printed.  However, I assume  an exit would be spaced out over time while these issues are dealt with.  There may be a partial “run” before decisions are made, but closing banks for several months doesn’t make sense.

No one really knows all the problems an exit would create, but now is not the first time thought is given to this development.  What is feared is the domino effect -  if Greece exits, will investors, businesses, governments and citizens then strongly suspect Spain, Portugal and Italy are next, ergo soaring interest rates?

 TODAY:  Without an unexpected surprise in the Industrial Production number at 9:15 today, I expect a rally failure starting around 11:15 a.m. today,  a drop to 12,545 (S&P 500: 1322), followed by a rally with resistance beginning at DJIA 12,735 (S&P 500: 1342) later this week. A good Industrial Production report would avert the late morning sell off, but this post will be released before that comes out.

ECONOMIC REPORTS

If reports this week show a marked weakening, the market will take a hit. Otherwise it has a chance to stabilize as investors await more clarification.

TUESDAY

Consumer Price Index (8:30) –  Unchanged in April. March was plus 0.3% vs. 0.4% in February.

Retail Sales (8:30) – Up 0.1% in April vs. a gain of 0.7% in March after a gain of only 0.1% in January.

Empire State Manufacturing Index (8:30)The Index jumped to 17.1 from 6.56 in March.

Business Inventories (10:00) – Up 0.6% in February against a 0.8% increase in sales resulting in an inventory/sales ratio of 1.28

Housing Market Index (10:00) -  Jumped to29 in May from 24 in April when it was off 3 points  after 7 straight gains. One of the  problems is there is a scarcity of sellers. The Index is comprised of a survey  covering present sales of new houses, sale of new houses expected over next 6 months, and traffic of prospective buyers in new houses.

WEDNESDAY

Housing Starts (8:30) – Rose 2.6% I April vs. an upwardly revised 2.6% in March. Permits for the period were down 7%.

Industrial Production (9:15) -  Unchanged in March from February. Capacity Utilization down a smidge to 78.6%.

THURSDAY

Jobless Claims (8:30) -  DROPPED 1,000 IN THE May 5 week to 367,000 from a revised 368,000. The 4-week moving average  was 379,000.

Philly Fed Survey (10:00) – The Index was  8.5 in April, down from 12.5 in March.  The New Order Index slipped to 2.7 from 3.3 in March.

Leading Indicators (10:00) – Gained 0.3% in March vs. a gain of 0.7% in February

George  Brooks

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The writer of  Investor’s first read, George Brooks,  is not registered as an investment advisor.  Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.

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Symbol Name Price Change % Volume
PDCO Patterson Companies Inc. 46.68 -0.50 -1.06 728,200

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