US Stock Market S&P 500 Consolidation Zone

Online, May 28, 2010 (Newswire.com) - Traders / Short Term Action
May 27th was one of those rare days when every stock symbol on the screens finished up, with many closing at the highs of the day. Media stock market commentators attributed the strength to China stating that they would not abandon European debt purchases. A better explanation is that fast money attempting to take the market lower this week were met with the larger purse of institutional investors at the pivot point we expected (see May 24th note). Shorts took this as a clear sign to take profits and cover, and value investors took this as the opportunity to buy oversold stocks. Further, The Trading Wings Option Radar shows a rapid reduction of bearish positions and an increase in bullish positions in both longer dated call options (sign of institutional investment) and short dated options (traders)

The Charts below show that we have moved from extreme oversold to neutral position. RSI is edging over 50, and the McClelland Oscillator, which is a ratio of the moving average on advancing versus declining stocks, for both NYSE and NASDAQ are approaching zero. The negative divergence trend in the McClelland is close to being broken. Note also that the S&P 500 closed just below the 200 moving average of 1105. This will be a line of resistance. Also, resistance from Level 2 broken support is in this same range. With a Memorial Day weekend ahead, we might see some reversal of May 27th's move on Friday.

Trading Plan: Next week should be the first real test of resistance. We expect short term bullish bias to reveal itself. Of course, fast money may retest the will of the market Tuesday, and institutional investors may give them that chance in the morning in order to buy at better prices. Trade the action at the support and resistance levels. Sell at Level 2, buy at Level 3, buy a break out of Level 2 and sell at Level 1 and so on.

Investors / Long Term Action
The horizontal bars show the volume traded at various prices since May 27, 2009 (one year). The red part of the bar is total volume on down days; green is total volume on up days. Note that the price range between the Level 3 support and Level 2 resistance represents the largest volume . This supports Trading Wings' premise that institutional investors see value at this price range, and that the 1035-1045 range is important support. Also note that the McClelland Oscillator began trending down in early March while the S&P 500 price continued to rise. This is called a divergence. A consistent divergence between price action and the McClelland frequently forecasts a price decline, as it shows that institutional buyers are withdrawing from the market. Interestingly, the divergence began at the same time frame that the S&P 500 price retested resistance at 1150 (dotted vertical line). Trading Wings expects that the 1150 range on the S&P 500 will prove to be a key level of resistance and consolidation. This level also corresponds to where we expect the Trading Wings Primary Buy Signal to present itself. Finally, the one year chart for the USA 10 year Treasury has bounced off a low that has frequently marked the start of a bullish bias to the stock market.

Investing Plan: There is time to wait for evidence of a sustainable uptrend. As discussed in our workshops, use this time to spot institutional commitments. During periods of little change (consolidation) or declines in the DJIA, NASDAQ, and S&P 500, look for ETFs that outperform, and for stock in those ETFs that are outperforming the ETF. Narrow the ETFs and stocks to those that show consistent out performance over a two week period as those most likely have institutional commitment. Investors should begin to scale out of short positions from our May 5 sell if the RSI manages to stay above 50.

Bottom Line:
Support: 1035-1045
Resistance: 1105. Stronger Resistance at 1150
Short Term Bias: Neutral
Long Term Bias: Neutral

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