On May 20th, we saw the American markets drop below the 200-Day Moving Average (see previous post) followed by continued drops and extreme volatility. And now almost one month later, the American markets have surged well above this technical level. Not only that, the markets are back close to positive territory for the year. For many, this is a good sign that the bear market has ended, something I had recognized, but I don't think this is the restart of the bull market.
The market tends to be extremely volatile during options expiry week (the third Friday of every month), where daily swings of over 100-points is typical. Traders may try to move stocks into more favourable positions against their options for maximized profit or minimized losses. Therefore, we could see markets continue huge swings before this week ends.
Today's huge rally was highly unexpected with very little significant news impacting stocks. Commodities, especially energy, have surged in the last week as signs of a recovering economy took focus away from the European crisis. The continued upward move on the day could be a result of a short squeeze, a situation where shorts are forced to close out positions for a variety of reasons.
Just eight trading days ago, the Dow Jones closed below 10,000 on bad jobs news. Today, it closed above 10,400 for the first time in almost a month. Although I think June will finish higher than the end of May, I do not see this rally sustained until the fall. Volume was average, suggesting few traders believe in this rally. Strong volume is required for technicians to feel confident in a technical break out.
I'm going out on a limb here, but I can see the Dow finishing below 10,200 by Friday, barring major news.
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