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Can Market Bounce Into End Of Q2?

 June 27, 2011 01:12 PM

US stock futures are marginally higher this morning ahead of what should be a very interesting week in the market. This week marks the last trading week of the 2nd quarter, so it is possible we could see the market get marked up at all. If the market breaks below its 200-day this week and then breaks the low from the Japanese crisis, it will be a sign of major weakness under the hood.

Over the past several weeks, traders have been stalking a bounce, and there have been several 1-day opportunities to buy stocks showing relative strength. However, the bulls have been unable to sustain any kind of meaningful bounce. This week that could change. The best strategy in this current tape, though, is light and patient. If you try to get cheeky and trade aggressively in this choppy tape, you will most likely end up getting burned. It still seems like we head lower at some point with all of the issues on the table right now, with the debt ceiling, Greece, Italy, the end of QE2, and the sputtering recovery.

Important levels to watch are S&P support at 1263, which is the 200 day. 1258 is the next level to watch, and then bigger support is 1249 (the Japanese crisis low). A close below all these levels (not just a intraday flash/fake out) should take us at some point to 1220-1227. If the market firms up, 1275 is the first point of reference to the upside. Bigger resistance lies at 1277-1283. If the bears really want short term control they will not let a close above this level. The top of the lower channel is at 1298-1302.

When sentiment does reach overly bearish levels and a bounce appears likely, it's the trader's job to identify relative strength. Find stocks that have held up well during the correction and turn to those first. You can also turn to market stocks even if they have not performed best. Apple Inc. (AAPL) was stuck in the mud for a period, but started acting much better after reversing off the $310.50 area.
Netflix Inc. (NFLX) was very strong, barely dipping below its 50-day MA. When this thing breaks resistance levels to the upside, it triggers a lot of short covering (~20% float short). You can get some nice moves in this thing.
Amazon.com Inc. (AMZN) is another that showed great relative strength, only briefly dipping out of its current base during the market correction.

Baidu.com, Inc. (BIDU) and SINA Corporation (SINA) are the best in the troubled Chinese internet sector. SINA was upgraded this morning by Goldman, which also upgraded Youku.com Inc. (YOKU) two weeks ago. It seems the once-proud investment bank has lost much of its credibility, as investors immediately sold off that outlandish $55 YOKU upgrade. Let's see how SINA acts.

Traders have also been watching some of the cloud names which have been acting well, especially VMWare, Inc. (VMW), Salesforce.com, Inc. (CRM), and Acme Packet, Inc. (APKT).

Lululemon Athletica, inc. (LULU) had a very strong week last week, and is the toast of the mixed retail sector right now. Under Armour, Inc. (UA) also busted out of its lower consolidation and looks like it could get back to highs if the market cooperates.

*DISCLOSURE: Scott Redler is short SPY
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