5/30 Week In Review: In mid-May, we found out that the trade deficit shrank to $58.2 billion in March, that is a 5.7 % reduction. This occurred because the weak dollar is making US exports competitive overseas. The shrinking trade deficit caused the first quarter GDP figures to be revised upward from 0.6 % to 0.9 %. The National Association for Business Economics has predicted that second quarter real GDP will grow at 0.4 % and they anticipate growth to increase to 2.2 % in the third quarter. And I think that their figures are realistic projections. The important thing about these projections are that they are all positive numbers. The third quarter's growth will be fueled by the rate reductions in the federal funds rate and tax rebates. In contrast, the Fed announced last week that it had lowered its projections of total GDP growth for 2008, believing the GDP will only grow by 0.3 to 1.2 %.

However, I do expect the unemployment rate to rise and hover near 5.5 % in the days ahead. Because corporations have been cutting their work force throughout the first and second quarters. But the unemployment rate is a lagging indicator, which looks to the past not the future. It will rise due to the sluggish growth during the first and second quarters. The stock market looks to the future and I believe the stock market will rise over the long-term, based on a much stronger second half of the year. Once again, the academic definition of a recession is two consecutive negative quarters of GDP. And I don't even think we will get a negative quarter of GDP in 2008 based on the economic data that I've studied. Incidently, next week the unemployment rate for May will be announced and it is expected to come in at 5.1 %.

The most important information in the current GDP report is that inventories decreased by $14.4 billion in the first quarter. The producers' durable equipment known as PDE, revealed that inventory is not sitting on the shelves.

A leading contributing factor that causes a recession to occur, is when manufacturers can't move inventories off their shelves, which is simply not the case here. Additionally, the Commerce Dept. announced Wednesday, that US orders for durable goods declined by - 0.5 % in April, which is one-third of the estimated -1.5 % that had been anticipated. That is an extremely strong durable good orders report given our current sluggish economic conditions, because orders are considered a leading indicator of manufacturing activity. Despite how much the experts try and convince the public that the US is in a recession, the economic data continues to suggest otherwise.

Home prices tumbled by 14.1 % in the first quarter, which sparked new home sales to post an unexpected increase. Sales of new homes rose by 3.3 % in April. In a speech this week, Federal Reserve Governor Randall Kroszner commented that he expects the housing market to gradually improve by the end of the year and to recover in 2009. However, the housing recession isn't over yet, with a 9 month supply of homes currently on the market. But I think Governor Kroszner's estimates represent realistic expectations going forward.

The May Consumer Confidence Index fell to 57.2, which is a 16 year low. As it declined for the straight fifth consecutive month and posted its lowest reading since October 1992 which was 54.6. This should be viewed as a contrarian indicator, which causes me to be long term bullish. Personal income and expenditure, Chicago PMI and the Michigan sentiment data all met expectations.

The dark cloud cover candlestick pattern that formed on crude oil at the end of last week, was confirmed this past Thursday, as oil prices dropped below 128 a barrel. Nevertheless, it is resting at support near the 126 level. The breakdown last week caused the MACD to get a bearish cross on the daily chart. Crude oil's daily chart could be setting up a possible head and shoulders top. Meanwhile crude oil's weekly chart got a bearish harami candle pattern this week, while a triple M pattern (m-M-m) formed on the MACD histogram. These are the first two candlesticks that form in a bearish three inside down pattern. Thus, if next weeks candlestick closes below the first weeks candlestick, it will confirm the harami pattern. Amazingly, crude oil has only had four down weeks this year! If crude oil loses its footing here, that would be a plus for the stock market and give it long-term staying power. Gasoline's seasonality may add further weakness to oil prices, as gas prices usually drop about .20 cents shortly after the summer kicks off on Memorial Day.

We had a bearish advance block 3-day candlestick pattern form on both the S&P 500 and the QQQQ , during the past three trading sessions. The advance block pattern is similar to a three white soldier pattern. But there is a significant difference, an advance block pattern is bearish and occurs in an uptrend, while a three white soldier is bullish and occurs in a downtrend. Notice the long shadows above the candlesticks of the second and third day on both the S&P 500 and the Qs , it reveals that sellers have come in at resistance during the past two trading sessions. The volume on Friday was extremely light, giving more authority to the advance block patterns. But the patterns must be confirmed by prices falling below the candlestick of first day in the pattern.

Moreover, we have three bearish chart patterns in play on the daily index charts. With a possible second top now forming on the Qs, in a double top pattern. The S&P 500 is carving out a possible right shoulder on a head and shoulders pattern. While the DJIA already broke down from a double top pattern and has now backtested and reversed off of the confirmation line of the pattern near 12,750 area. The transports ETF (ticker IYT) looks to be forming a head and shoulders pattern.

The S&P 500 is trapped in a narrow range between support and resistance, having bounced off its 50-day SMA at 1379, while unable to clear the 20-day SMA at 1402, with mega overhead resistance at the 200-day SMA at 1425 (9th chart below). While the DJIA is having a difficult time breaking above its 50-day SMA at 12,683, and remains well below the 20-day SMA. While the Nasdaq and the Qs both remain above their 20- and 50-day SMAs. The tech rally continued Friday as Dell and Marvel posted better-than-expected earnings. Dell rose 5.7 % and Marvel catapulted 23%.

The S&P 500 and SPY 10-minute charts have formed a bearish descending triangles , while the QQQQ 10- minute chart has a bearish rising wedge . The SPY 60-minute chart shows oscillators are extended and the MACD got a bearish cross, while the histogram and the RSI are both sporting negative divergence. The ADX line is dropping, as the +DI is weakening.

I believe that we could be completing minor wave b, in an abc corrective move. If prices falter next week, wave c could develop. Should the advance continue, a revision of the count will be necessary. Thus, changing wave a to wave 4, which would mean that wave 5 is still under construction. Lets monitor how this pans out closely.

I think June will be highly volatile due to the reshuffling of the Russell indexes. There are 120 funds tied to the various Russell indexes and that might prompt fund managers to dump certain stocks and reallocate their hedge funds or mutual funds accordingly. So the sell in May mentality could spill over into June. Additionally, the volatility index (VIX), the gage of fear has backtested its bullish falling wedge and is once again at levels of complacency. I believe the VIX will rise to backtest the broken 2007 trendline. Even though prices rallied this past week, the market couldn't completely repair the enormous technical damage done in the prior week. It will take the indices rising above their 200-day SMAs in order to continue to draw in new money. If the averages manage to do that, it will cause a tremendous amount of short covering. Personally, I still remain short-term bearish and expect the ultrashorts to come back to life in the early part of June.