The swift and powerful market decline last week pushed many key indicators into oversold or near levels where reversals normally occur. Though the pullback in equity indexes was expected, the magnitude was not. Models have been forecasting a retracement in late May to early June since April. Please see the April newsletter in the Equity section.

Today's equally massive recovery may suggest that the low is here. However, short-term models also show that there is some additional room for a downward retesting. Probability models (Monte Carlo) indicate the next two weeks should be approached with caution.

Bottom line: The NYSE Composite needs to advance over 7400 before the correction is complete. Market psychology (fear & greed) plays a much bigger role now than fundamental or economic data. Traders attitudes can change very quickly. Technical gauges, for the most part, are signaling the low is likely near.

Investment approach: Last week's elevator drop should remind investors how quickly contentment and optimism can change to fear and selling. A cautionary stance is still warranted over the next two weeks. Investors may wish to remain on the sidelines until a clear signal is given.

Longer-term models still suggest that the bull market is intact and the outlook into June through to August should be flat and range-bound. The next projected low is expected in September.

Your comments are always welcomed.

By Donald W. Dony, FCSI, MFTA
www.technicalspeculator.com

COPYRIGHT © 2010 Donald W. Dony
Donald W. Dony, FCSI, MFTA has been in the investment profession for over 20 years, first as a stock broker in the mid 1980's and then as the principal of D. W. Dony and Associates Inc., a financial consulting firm to present. He is the editor and publisher of the Technical Speculator, a monthly international investment newsletter, which specializes in major world equity markets, currencies, bonds and interest rates as well as the precious metals markets.

Donald is also an instructor for the Canadian Securities Institute (CSI). He is often called upon to design technical analysis training programs and to provide teaching to industry professionals on technical analysis at many of Canada's leading brokerage firms. He is a respected specialist in the area of intermarket and cycle analysis and a frequent speaker at investment conferences.

Mr. Dony is a member of the Canadian Society of Technical Analysts (CSTA) and the International Federation of Technical Analysts (IFTA).

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