Will we see a short-term bounce next week?

The holiday shortened week was filled with more volatility. Ultimately, the market ended lower as record oil prices, continuing financial sector woes, auto-industry concerns and more evidence of a slowing economy were just too much for the bulls to absorb.

For the week the Dow, S&P, NASDAQ and Russell 2000 declined -0.5%, -1.2%, -3.0% and -4.6%, respectively.

Monday ended what was the worst June since the Depression Era. It also ended the worst first half to a year to the Dow (DIA) since 1970. The 14.4% decline was the tenth worst in over 108 years for the market stalwart.

Tuesday, the first trading day of the third quarter, lived up to its historical seasonal billing as the S&P (SPY) bounced of its lows to finish the day in the black. However, the positive sentiment did not last long as Wednesday witnessed yet another sharp decline on the heels of a downgrade and rumors of a possible bankruptcy at GM. The stock dropped 15% on the day to a 54-year low. The stock was the major culprit in the overall decline in the major benchmarks.

On Thursday it was announced that the U.S had lost more than 60,000 jobs in June marking the sixth straight month of losses for the economy. With more job cuts expected, there is a growing concern that many people will decrease their spending later this year when the bracing effect of the tax rebates fades, dealing a dangerous setback to the shaky economy.

“The deteriorating jobs climate will dampen many a barbecue this weekend. It’s hard to celebrate when you are out of a job,” said Richard Yamarone, economist at Argus Research.

Technically speaking the market continues to sit in a short-term “oversold” to “very oversold” state. I expect to see a short-term bounce over the short-term (1-3 days) due to the aforementioned technical extremes and the upcoming positive seasonality that historically follows the July 4th holiday.

However, after that, well, we will have to see when the time comes. I would not be surprised to see the smaller-cap benchmarks like the NASDAQ 100 (QQQQ) and the Russell 2000 (IWM) carve out new lows before we see a significant bounce. At this juncture, it seems as though traders are expecting some type of capitulation event before anyone is truly willing to buy with conviction.

Overbought/Oversold Levels for July 3, 2008

ETF Extremes Options Strategy

* S&P 500 (SPY) - 19.4 (very oversold)
* Dow Jones (DIA) - 26.6 (oversold)
* Russell 2000 (IWM) - 10.6 (very oversold)
* NASDAQ 100 (QQQQ) - 25.6 (oversold)

Sector ETF Extremes Options Strategy

* Biotech (IBB) - 69.1 (neutral)
* Consumer Discretionary (XLY) - 24.1 (oversold)
* Health Care (XLV) - 52.8 (neutral)
* Financial (XLF) - 12.9 (very oversold)
* Energy (XLE) - 31.3 (neutral)
* Industrial (XLI) - 28.5 (oversold)
* Materials (XLB) - 13.5 (very oversold)
* Real Estate (IYR) - 19.9 (very oversold)
* Retail (RTH) - 24.8 (oversold)
* Utilities (XLU) - 42.3 (neutral)

If you would like to follow my strategies with real-time alerts or have them autotraded by a participating broker please click the following link: Try our strategies for a 30 day risk-free trial!