It was an ugly week for the equities markets, largely due to uncertainty over Wednesday's Fed comments. During the first 3 sessions of the week, more of what we saw in previous weeks took place, with money leaving the Tech sector and finding its way into blue chip shares. However, every sector was sold in an aggressive manner on both Thursday and Friday. There didn't seem to be much to the selling, beyond concerns over inflation and the possibility of a more hawkish Fed. More than likely, large asset allocators were shifting money from stocks to bonds in order to capture higher, risk-free yields. Sell programs, which sell stocks with little regard to price (i.e. it's all computer driven), were running rampant throughout those 2 days. Overall, it was a bearish way to end a week that started with so much optimism over the Fed pausing.

Given the severity of the declines over the past 2 sessions, the question most traders are now probably asking is whether this is the start of a serious decline, or a mere correction in the midst of a bull market. Because this bull market is now mature in terms of duration, it would be normal to experience some sort of a bear market at this stage. This doesn't mean a decline as severe as 2000-2002, as that was likely a once in a generation type bear market. However, given how far along the Fed is in its tightening cycle, it's always possible that we could be nearing a medium-term market top. Additionally, recent fundamental data and the recent price action in the tech sector could both be the writing on the wall for the end of a bull market cycle.

It's important to remember that a 5%-10% correction in the S&P 500 is normal and often times necessary to restore the overall health of the market. Also, the best trading opportunities, both long and short, often arise during market corrections. This is because volatility almost always increases during market declines. For those who are nimble, the next several weeks could end up being one of the better opportunities to make money with regard to intraday trading. As far as market direction from a longer-term perspective, it's best to keep an eye on market internals. If these deteriorate further in the weeks ahead, it will likely serve as an early warning sign of a more protracted market decline, which could last into September/October. It's also possible that the prior several days of weakness was nothing more than a much-needed correction. If that's the case, it's very possible that we see a powerful snapback rally occur. As we all know, the market these days has a short memory at best.

Daily Pivot Points for 5-15-06

Please feel free to email me with any questions you might have, and have a great trading week!

Chris Curran

Chris Curran started his trading career at the age of 22 with a national brokerage firm. He combines fundamental and technical analysis to get the big picture on the market. Chris has been trading for 15 years, starting full time in 1997, and has never had a losing year as a full-time trader.