June 1, 2010 – Bring on the Right Shoulder



Featured Trades: (GS), (AAPL)

1) Bring on the Right Shoulder. That is the refrain I am hearing from a number of technical analysts this morning. They believe that last week's dead cat bounce in US stocks was nothing more than short covering ahead of the three day Memorial Day weekend and month end window dressing.  The surge is setting up a classic 'head and shoulders' top, with the left shoulder made on January 18 at 1,150, leading to a head at 1,220 on April 25. Where is the right shoulder? Worst case, we only get back up to the 200 day moving average at 1,110. Technical perfection is reached at 1,150, and the best-case scenario takes it up to a double top at 1,220, which I would be amazed to see in the face of deteriorating global fundamentals. It could take several weeks or months to get the right shoulder, but not later than end summer. For 'tells' on which scenario is going to play out, and how long it will take, watch NASDAQ, which put in the most technically rigorous bottom last year. You can also watch pathfinder stocks like Goldman Sachs (GS) and Apple (AAPL). Another aid will be the euro/yen cross, that great indicator of global risk taking. If it breaks to new lows below ¥109, head for the hills. There may be a long side summer trade in stocks for the nimble, but let's face it, the next big move in stocks is likely to be down. The wild card is the nonfarm payroll coming on June 4. Anything short of the 500,000 blockbuster number some analysts are expecting could tank the market. Once the right shoulder is in, I expect a spiral dive down to my downside target of 9,000 in the Dow and 950 in the S&P 500, which are big Fibonacci numbers, and a neat 50% retracement of the move up from the March, 2009 low.

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