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Where Are Stocks Heading Next?

After enduring one of the more tumultuous months in recent history in May, investors and traders received some much-needed relief as the start of June provided the best-performing week of the

After enduring one of the more tumultuous months in recent history in May, investors and traders received some much-needed relief as the start of June provided the best-performing week of the year. After the recent sell-off, which was sparked by weak jobs numbers, stocks have been able to regain their footing after bouncing off the 1278 low and retaking the 1300 level.

In this week’s interview, we asked Toni Turner of TrendStar Trading Group if this could perhaps signal at least a near-term bottom for stocks, as well which indicators she’s using to help play this market.

EQ: Since bouncing off its low early last week, the market has fared pretty well so far in June. Could this be a turning point for investors?

Turner: I’d like to think so, but it’s just that we had a pretty eventful news weekend, and the market is still pretty much being held hostage with the Greek election. So it is a little hard to say, but if we look strictly at just the chart of the S&P 500 and disregard the news, I would say technically speaking, that the S&P 500 has resistance at 1335, and what I could see happening is that the S&P 500 could perhaps move in a range for a few days between 1291 support and 1335 resistance. Today’s opening burst higher on the news that Spain will receive bailout funds for its banks lost its enthusiasm fast, and of course the market closed right near its lows, usually not a promising sign in the short-term. No one has even mentioned the fact that China is scaling back on its European holdings. There’s just so much going on that it’s anybody’s best guess as to where the market will go next.

EQ: How can traders use momentum indicators to help them gauge whether the market is oversold or overbought?

Turner: It really depends on the timeframe that they are trading in. Whether they’re position trading, swing trading or day trading, many times their style will determine which momentum indicators they want to use. For example, position traders who look to trends can follow the Moving Average Convergence-Divergence (MACD) oscillator, because that’s a trend-following, lagging indicator. It’s is very gentle, but it does give bullish and bearish divergences. So the indicator will diverge from price if it thinks a particular trend may be weakening.

Stochastics, particularly Slow Stochastics, are indicators that work well for shorter timeframes. I call this the drama queen of indicators, but it’s very helpful when watching consolidating stocks to signal a breakout or a breakdown. It also produces useful bullish and bearish divergences in oversold and overbought stocks. Many traders use the Commodity Channel Index (CCI) and Relative Strength Index (RSI). Of course, you can adjust the default if you want them to react faster or slower to price movements for your trade. Generally, the less time you use as a default on the indicator, the more reactive the indicator will be.

EQ: The VIX has fallen pretty hard since peaking on June 1st. Does this signal a reverse in investor sentiment and fear?

Turner: What I’m seeing here is that it has been more or less trading in a range since the first week of May when it was at around $21, to the recent high of $27.73. Today, though, the VIX gapped down to below 20, then when the market shrugged off Spain’s bailout news, it rose more than three points to close on its high over 23. Talk about pleasure turning into pain… What bothers me about the VIX right now, however, is that I believe it is forecasting more volatility because the index itself is encountering wider intraday swings. It’s Average True Range is climbing and has been doing so much of the time since the first week in May. The bottom line is–if the wide price intraday swings continue, then I think that we’re going to continue with the rollercoaster market that we’ve been in.

EQ: What particular stock groups or ETFs are you watching closely for the coming week?

Turner: I’m watching the SPDR S&P Metals & Mining (XME), because if we get good news out of China and if we see a reversal on the markets here at some point, it’s quite possible that during the next few weeks, metals themselves will go higher. Also, I would say that the Utilities Select Sector SPDR (XLU), which we have discussed in the past, has broken out to the upside and traders who are in that may want to trail their stops now. Another group I still like is biotechs and the SPDR S&P Biotech (XBI). It is trading horizontally, although, it is not the world’s most sedate sidestep. I would recommend that people in the XBI keep a big bottle of Maalox on their desk.

The Fed model compares the return profile of stocks and US government bonds.