Weekend Market Outlook - 5/18/2008

The weekly chart of the SPY which is a stock traded to mirror the returns of the S&P 500 continues its bearish volume pattern as shares trading hands continue to dry up more and more the higher we go. This is NOT the sign of a healthy market and is a very genuine concern for me.



This development alone has about 70% input into my current bearish 45% equity allocation, and until this trend makes an attempt to shift into a positive direction I will continue to scale back my exposure to stocks.

As much as I am trying to remain optimistic about the future course of stock prices, I am really starting to see some credible signs that this rally off the lows is nothing more than a counter trend rally in a bear market.

Next week bring us the post option expiration week and as you can see by the chart below, it tends to have a negative trend with the exception of Wednesday.

However, based upon the market pattern on Friday, the odds favor a fairly strong rally on Monday that should quickly be followed by lower prices. You will notice on the chart below that Monday carries with it a very minimal negative return and recently the daily patterns have been very accurate.

On the subject of the daily patterns, the pattern on Friday Inverted in the Morning, but almost on the nose in the 1:08pm time frame, the market began a fairly decent sell off. Unfortunately there was not enough downward pressure to keep pushing prices lower and buyers came into the market and sent the futures higher. This led to a break even trade on selling the 1pm time frame and we remained flat the rest of the day as option expiration day can be very unpredictable and I did not want to get caught on the wrong side of the market and turn a break even day into a losing day.

These daily patterns that I have been following as I said, have been quite accurate and a fairly good guide for those of you who want to grab a slice of the intra-day Price movements.

Monday calls for higher prices.

The ideal pattern for Monday is a flat opening followed by some very modest weakness for the first 5 to 10 minutes. This should be followed by a nice upward move into the 1:15pm time frame at which time the market could enter a consolidation zone and chop around at these higher prices until about 3:40pm at which time the rally should resume into the close. Monday is slated to close at the very high end of its trading range so aggressive short term traders should be looking to establish long positions on any type of weakness we may encounter.

The chart below illustrates both the probability of an up or down close as well as an average return. Next week covers day 13, 14, 15, 16, and 17 and the chart explains the rest quite clearly, showing Monday being a decent up day, but soon to be followed by weakness for the rest of the week.

By the way, these charts were taken off the www. SentimenTrader.com website and I encourage all of you to take a look at it. It is a very good site that has much to offer that is hard to find anywhere else.