Morning Call: Bearish Sentiment Reaching Climactic Levels

US stock futures once again point to a lower open, currently sitting barely above last week’s low. With more weakness over the weekend, the market is coming into a crucial area. The S&P now looks set to bump into its 200-day moving average, while the Nasdaq is well below its 200-day. We are now in the midst of a 7-week losing streak, but still only just more than 7% from the highs. All in all, this down move has been nothing to panic about, but don’t tell traders that, because the put-call ration has reached its highest levels since the S&P was at 666. When the bounce does come, it will inevitably trap a lot of chasing shorts, which will make it prolonged and ferocious. The risk reward short-term at this stage is skewed in favor of longs.

Last Summer, we danced around the 1040-1050 area in the S&P from late May to early September. During that time period the market absorbed some pretty tough headlines. Will this market repeat the same pattern? That’s what smart money will be looking to see. You can’t just blindly chase shorts down at these levels. If we hold here and get a strong bounce, I think the odds are that we see another range-bound summer. If this zone breaks and we close below, this market could see big pick up in volatility and then 1220-1225 comes into play. It feels like the lowest we can go is 1170-1180.

As mentioned, tech is now comfortably below the 200 day, which is a very bearish sign. Some think it is a trap, but there has been some real selling and a ton of technical damage in this group. You must keep a close eye here. Some think it is a trap, and I am inclined to agree to a certain extent. Select tech stocks will continue to act well.

The Russell is hanging on to its 200day by the skin of its teeth.

The Oil Service HOLDRs ETF (NYSE:OIH) is finally coming into its 200day around $140.59. Let’s see if it holds that level, and if it does it could be an outstanding buy.

The Retail HOLDRs ETF (NYSE:RTH) is also hovering on its 200day with no big bounce. Another one traders will be watching the action for bounce or plunge?

Apple Inc. (NASDAQ:AAPL) is one that we will be keeping a very close eye on. There are few times a year when you can trade AAPL with any real edge, but I think these are the times when you can. We all know the story of AAPL, it is a fast growing company that is expanding to several different consumer tech areas and eating everyone’s lunch. You’ve seen what they have done to Research in Motion Limited (RIMM). Apple’s analyst price targets are well in excess of its current price, it’s just a matter of how it gets there. If you look at a weekly chart, AAPL is coming to the bottom end of a large bull flag, and provides a great area to start piecing into some longs. It could see more downside, but expect another stellar earnings quarter coming up and don’t expect this stock to be down for long.

SINA Corporation (NASDAQ:SINA) and Inc. (NASDAQ:BIDU) are both finally hitting their 200day MA’s after leading the market higher for the early part of this year. Traders leaning short on these stocks have been rewarded. Can this hold for a day or so? SINA closed below and its next spot is $75.

BIDU is barely holding the 200day around $114-116. The next big spot will be $108-112. This also gave a sell signal on the bearish technical outside day on April 28th, then it confirmed it when it broke $145-147 on May 3rd.

Again, it is hard to think that this week will not bring a strong bounce. Sentiment readings are climacticly bearish right now, and smart money is confident in the bounce. When you get that scenario, oversold bounces can squeeze shorts and turn into multi-week moves.

Scott Redler
Scott Redler is the Chief Strategic Officer of T3 Live. He develops all trading strategies for the service and acts as the face of T3 Live. Mr. Redler focuses on thorough preparation and discipline as a trader. Scott Redler has been trading equities for more than 10 years and has more recently received widespread recognition from the financial community for his insightful, pragmatic approach. He began his career as a broker and venture capitalist where he was able to facilitate relationships that led him into trading. Beginning his trading career at Broadway Trading in 1999, Scott moved on with Marc Sperling to Sperling Enterprises, LLC after establishing himself as one of the best young traders in the firm. As a manager at Sperling Enterprises, he maintained his status as a top trader in the industry while working closely with all traders in the firm to dramatically increase performance. Scott has participated in more than 30 triathlons and one IronMan triathlon, exhibiting a work ethic that also defines his trading. His vast knowledge and meticulous attention to detail has led to regular appearances on CNBC, Fox Business and Bloomberg, and he has been quoted in the Wall Street Journal and Investor’s Business Daily among other publications. Scott produces much of the media and content available to subscribers and followers. is an online financial media network and education platform that provides active traders and investors with market analysis, real-time access to strategies, and in-depth training from real traders, real-time.

*DISCLOSURE: Scott Redler has no positions

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