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Volatile trading after stronger than expected ISM data

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It has been a volatile early morning session as stocks went from their session high, back to new session lows after the ISM index of business conditions rose to 55.7% in May after sinking to 53.9% in April. Today's reports ISM reading of 55.7% is the highest since February of 2001 and was slightly above economists' forecast of 54.4%.

Now orders rose to 63.1% after a 59.0% reading in April, while production rose to 58.7% after April's 58.0% reading.

The prices paid component jumped to 63.0% after a 60.3% reading in April. Today's 63.0% reading was the highest since January 2001. ISM said that energy was still a concern, but the pass- through of energy prices was slowing in recent weeks.

Employment at the manufacturing level edged higher at 47.3%, but was still below the 50% level for the 20th straight month, indicating that the manufacturing sector continued to shed jobs in the month of May. Sub-sectors showing hiring were the primary metals, furniture, transportation and equipment and printing and publishing areas.

Stocks rebounded, then headed lower

The major market averages did try and rebound after the ISM data was released, but then soured and hit session lows.

The Dow Industrials jumped about 50-points higher from the 9,930 level within 10-minutes after the release of the ISM data, but quickly reversed course to trade a session low of 9,802.90. We continue to note that the Dow Industrials has found buyers just above the 9,800 level since April 29th's low of 9,811, May 6th low of 9,807 and last week's low of 9,802.23.

Good correlation can also be found perhaps between the Dow Industrials 9,800 level and the 1,050 level in the S&P 500 Index (SPX.X) 1,054 -1.18%. The relative low that many traders are monitoring for support here is the May 7th low of 1,048.96, which is very close to the 38.2% retracement level I have been monitoring for support.

S&P 500 Index Chart - Daily Interval

A close below the 1,045 level on the SPX would be further bearish for the broader S&P 500 Index (SPX.X). We're seeing more and more stocks break upward trends from their bar charts and that action is technically bearish. This puts many "support levels" as being horizontal, and not technically as sound as an upward trend.

The sell signal in the S&P 500 Index (SPX.X) from April's trade at 1,090 has the bearish vertical count of 960 currently in play and hints at a re-test of the September lows. This information combined with the above retracement on the bar charts has me monitoring the SPX at current levels very closely.

As of Friday's close, the S&P 500 Bullish % ($BPSPX) from www. stockcharts.com had this market in "bull confirmed" status at 60%., but a reading of 56% would have the SPX reversing to "bear confirmed," thus a good probability trader for bears to be looking short/put on a break below the 1,045 level.

If the Dow Industrials (INDU) were to make a "unison" break lower at 9,800, we could see some sharp downside action in the sessions to come.

Jeff Bailey
Senior Market Technician
Option Investor

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