This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

The Market May Have Bottomed

This column was originally published on RealMoney on May 30 at 12:33 p.m. EDT. It's being republished as a bonus for readers.

The major indices look more stable after last week's uptick. I believe that a bottom may now be in place that lasts well into the summer months, and we could see the market climb a wall of worry and return to this year's highs by August.

Don't expect a V-shaped recovery that shoots prices back to the highs immediately: We're likely set for a rocky journey that tests the wills of players on both sides of the market.

First we need to test the unstable rally that ended last week's trading.

With a little luck, the next decline will find strong buying interest above recent support.

My positive attitude is based on the weekly chart of the S&P 500. Bull-hammer reversals just don't get any prettier than the one printed on the weekly chart by last week's recovery. This "big" low will be an obstacle to traders planning on selling rallies as the market tries to move higher.

It is a strong sign that short-side crowding will keep that strategy from paying off well into the summer months. (See first chart below.)

Excess bearishness right now reminds me of April 2005, when the major indices had sold off for two months and convinced everyone that another sharp decline was just around the corner.

But the market had other plans. After several feints to the downside, the indices turned tail and started one of their biggest rallies of the year.

The April 2005 scenario also makes sense when looking at the weekly Market Volatility Index. Notice how it rallied into a test of the level hit during that deep correction and then dropped sharply. This confirms the significance of last week's recovery and the start of a favorable period in which buyers can dip their toes back into the financial waters. (See second chart below.)

Let me emphasize that I don't expect a straight line back to the spring highs. At a minimum, the major indices need to pull back sharply and fill in the unstable basing pattern. This consolidation would draw in weakhanded sellers for a final shot at taking out support and encourage buying interest by aggressive bulls. In turn, it would set the stage for a catapult off the lows.

Indeed, the S&P 500 looks less bullish on the daily chart than on the weekly. Notice how it shot above the four-day swing high without first testing the three-day swing low. This generates an unstable megaphone pattern that's dangerous for overnight positions until the index prints a higher low. I'm looking for that bounce to start at or above 1250.

Many readers want simplicity in their chart analysis, but I can't help them here. This is a complex situation in which there will be no perfect buying moment. Clearly, positions on both sides of the market need to be well timed to book profits as we head into June and July. But it has been tough to make money all year -- why should now be any different?

The biggest curiosity to me during the selloff was the intimate relationship between energy and commodity stocks and broad-index movement. If you had any doubts that these volatile issues were holding up this year's market, they should now be gone. This lockstep movement points to a bearish resolution after we squeeze out the next recovery.

But now isn't the time to worry about the downside. Instead, traders should be building watch lists of oil service and steel stocks that held up reasonably well in the downturn. Right now, my favorite oil play is Diamond Offshore (DO), which bounced off the 78.6% retracement of its February-May rally last week. This Fibonacci line in the sand often sets up strong bounce trades.

Look for the current bounce to stall early this week and yield to a decline that drops the stock below $80, taking out the stops that are sitting there. A recovery from that price level should yield a rally that reaches $88 to $90. Once again, this is a timed position, in which profits must be taken when the stock moves up to test resistance.

Here are other commodity and energy names that show good upside potential in the weeks ahead: McDermott International (MDR), Weatherford International (WFD), Frontier Oil (FTO), Peabody Energy (BTU), Glamis Gold (GLG) and Agnico-Eagle Mines ( AEM).

Keep in mind that basing patterns take time to form. If past is prologue, we should expect two more weeks of sideways action before the market bounces strongly and tests broken support. Of course, the shorts will pounce aggressively at new resistance, but I think they'll get squeezed hard and provide fuel to lift prices much higher than the current consensus.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Weatherford to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

P.S. from Editor-in-Chief, Dave Morrow:
It's always been my opinion that it pays to have more -- not fewer -- expert market views and analyses when you're making investing or trading decisions. That's why I recommend you take advantage of our free trial offer to's RealMoney premium Web site, where you'll get in-depth commentary and money-making strategies from over 50 Wall Street pros, including Jim Cramer. Take my advice -- try it now.

Here's your chance to pick the stock you'd like me to feature on my radio show June 1:
NYSE Group

REMEMBER to listen in on Thursday for my take on the stock that wins this poll!

Alan Farley is a professional trader and author of The Master Swing Trader. Farley also runs a Web site called, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback; click here to send him an email. Also, click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 18,053.71 +23.50 0.13%
S&P 500 2,088.77 +6.89 0.33%
NASDAQ 4,806.8590 +33.3870 0.70%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs