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."

Bank of America Merrill Lynch was also getting more bullish on stocks, arguing that policy makers are getting ready to come to the rescue once again, pressured by softening U.S. economic data and the coming end of Operation Twist.

"Weak Q2 asset prices have coincided with weak Q2 economic data: BofAML Global Activity Surprise Index shows net 11% of global economic data have surprised on the downside over the past 3 months = weakest in more than 3 years," the firm wrote, adding later: "So a policy ease has begun. Aim of policy is Summer of Stabilization. Australia & China have eased. BoJ (Jun 15th) & US Fed (Jun 19/20th) meet this month, as do Europe's leaders and G20 in Mexico on Jun 20th. Best way to monitor success via US$ & US bond yields. Upward pressure on yields, downward pressure on dollar would be sign of success."

Next week is likely to be all about policy makers with Spain reported to be considering making a request for a bailout over the weekend. On the corporate front, the biggest event is likely come courtesy of Apple ( AAPL) and its worldwide developer conference.

Apple shares are closed up Friday at 1.8% at $580.32. The stock is up 39% so far in 2012, but it's down 10% since hitting a 52-week intraday high of $644 on April 10.

The sell side still loves Apple with 46 of the 51 analysts covering the stock at strong buy (22) or buy (24) and the 12-month median price target at $740. Bank of America Merrill Lynch is among the bulls with a buy rating and $810 price target, and the firm is expecting the company to assert its leadership in software at the conference.

" T he event should serve to showcase and educate developers on OS X Mountain Lion and iOS 6," the firm wrote on Friday. "We will also likely see a broad-based refresh in Mac lineup, with major revisions in MacBook Pros and iMacs. Apple's continued innovation in software should keep Apple ahead of competitors, and we maintain Buy on growth potential and attractive valuation (10x C2013 P/E vs. S&P 500's 12x)."

-- Written by Michael Baron in New York.

>To contact the writer of this article, click here: Michael Baron.
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.