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Weakness Permeates Throughout the Market as Stocks Close Near Session Lows

May 25, 2011 2:26 AM ET
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Joshua Hayes's Blog
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Seeking Alpha Analyst Since 2008

Joshua "MauiTrader" Hayes is CEO, president and founder of Big Wave Trading Inc. (http://www.bigwavetrading.com/), a Maui, Hawaii-based stock market advisory service. Hayes is a well-respected stock picker and technician who combines fundamentals, psychology and money management to trade professionally in his own family, and friends accounts for more than 12 years on Maui. Hayes also runs BigWaveTrading.com, an online stock market commentary and stock selection service for short- and intermediate-term investment strategies using CANSLIM and other strategies. Hayes has been a contributor to Telechart as Sir Aloha, Realmoney.com, InvestorsParadise.com and TokyoJoe.com.

New home sales jumped more than expected but it was the data out of the Richmond Federal Reserve Bank that shook up the market. The manufacturing index flashed a negative reading well below the expected reading showing manufacturing is slowing significantly. Traders took to the market selling down the market as buyers are on a strike. Sell in May and go away continues to plague the market and now with the NASDAQ firmly below its 50 day moving average the market is at risk for further price destruction.

Today’s close certainly was less than ideal as the last half hour saw the NASDAQ drop 10 points. Weak closes are a signal the market is under distribution and prices will be coming down. The market remains in extreme oversold conditions and a bounce is likely here, but any bounce without massive volume will be sold. It would not come as a surprise for the NASDAQ to run back towards its 50 day moving average before we begin to see some major selling.

Another reason for a bounce would be an overwhelming amount of bearish sentiment. Last week the number of AAII Bears outnumbered those who were bearish as the Japanese crisis unfolded. This does not guarantee a bounce, but it does signal the possibility a snap back rally to shake out weak shorts before resuming the downside move. Remember, we are in the third year of a bull market and the third year tends to be VERY CHOPPY. Have we had a big top? Perhaps, but we have a very weak market in front of us and it will be some time before we get a respectable move higher.

If we get further weakness it is a signal to get out, but there is a high probability of a 2-3 day bounce in the market. Use this bounce to raise cash, unless volume swells, but it is highly unlikely at this point. There isn’t a slew of leaders looking to head higher and former leaders are looking very weak. All signs are pointing to this market lower over the next few weeks. Be prudent and wait for proper signals. No need to be a hero in this market.

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