As we head into the extended Memorial Day weekend, stocks are set to snap a 3-week losing streak and post their biggest weekly gain in over 2 months. You could argue that the back of the bear has been broken and the worst is behind us, but Richard Suttmeier, Chief Market Strategist at ValuEngine.com, is not seeing that in the charts.
The market technician says we could be in for a rocky summer since his works argues that the highs for the year have already been set. Adding to his unease, Suttmeier says 2 weeks ago he got simultaneous ''sell signals" from all 5 of the major stock indexes: Dow Jones Industrial Average (^DJI), S&P 500 (^GSPC), Nasdaq (^IXIC), Dow Transports (^DJT), and the Russell 2000 (^RUT).
"Simultaneous is the key," he says, pointing out that while the Dow, S&P and Nasdaq were setting new highs this year, the Transports and Russell weren't following the move. "That to me is a big negative divergence and they (Transports and Small Caps) started leading to the downside and pulled the rest of them with them," warns Suttmeier.
So while we have we have put together a nice little rally in the face of continued stress out of Europe, China and elsewhere, Suttmeier advises to stay clear and keep an eye on the support of the Nasdaq at 2698.
"The Nasdaq has the lowest support to break at 2698," he says of its 4.8% cushion, which is the smallest of the main indexes . "We could see a real troubling meltdown if we close below 2698" and could find ourselves "heading back towards the October lows of last year."
For the record, the Nasdaq bottomed at 2268 on October 4th. If re-test that level it would mark about a 20% decline from current levels and nearly a 28% retreat from the Nasdaq's near-term high in late March. The S&P 500 is still about 23% above its October low.
So while other strategists talk about summer swoons, election year cycles, Euro contagion and any number of troubling indicators, Suttmeier's focus right now is far more precise.
"The S&P 500 needs a weekly close above 1363 to restore a buy signal," he says.