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More Volatility Ahead for Stocks: Analyst

NEW YORK ( TheStreet) -- While stocks are coming off a strong week, investors shouldn't assume the S&P 500 is out of the woods just yet.

"The stock market is in the process of tracing out an intermediate-term reversal formation, in our view, which we think could take a couple of weeks," wrote Mark Arbeter, chief technical strategist at S&P Capital IQ. "While the major indices appear to be tracing out double bottoms or inverse head-and-shoulders bottoms, many individual stocks as well as sectors have seen a lot of technical damage and will probably need time to repair their charts. This process will most likely keep the major indices in a volatile trading range in the weeks ahead."

In commentary released during Friday's session, Arbeter noted how the S&P 500 had been hovering around its 200-day exponential moving average of 1314 the past few days. The index booked a 10-point or so gain on Friday, but he thinks it will need to take out 1335, the high from late May, in order to complete a bullish reversal pattern.

Other key levels to watch are 1341, which represents a 50% retracement of the S&P 500's decline since May 1, and 1360, where Arbeter sees technical resistance coming into play.

The good news is that investors may have already seen the near-term bottom.

"On the downside, we think the low was put in during last Friday's mini-capitulation, and after this near-term rally ends, we could see some backing and filling, but we do not believe that the recent lows will get tested," Arbeter wrote. "Even if the "500" does drop to minor new lows, we believe that will still be part of the bottoming process. So, in the near- to intermediate-term, we think the "500" will most likely be confined to a very volatile trading range between the 1,250 area on the downside and 1,360 on the upside."

Arbeter was reading the volatility that the market has seen of late as a turning point in terms of strategy.

"As we have been warning, we thought many markets were at or near major inflection points and have been suggesting that it's time to lighten up on what has been working and reallocate to those markets that have not been working," he said. "That is, sell Treasurys and the U.S. dollar, and buy stocks and commodities. These markets were pretty stretched, with sentiment at extremes for all of them, so it's time to go the other way, in our view."
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