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Wednesday, August 11, 2004
Good evening friends,
Market Recap
Tech bellwether CSCO came out with earnings results last night after the bell, and they guided lower. This news impacted the futures and they were down big before the markets opened. Remember; do not to pay any attention to the futures because they do not matter by the end of the day. Although the Dow was down -90 points, it managed to wipe out most of the days losses and even went slightly green before closing down -6 points. The S&P closed down -3 points, but the NASDAQ had a rough day. It was down -26 points and at one point it was down -48 before it came back to fill the opening gap down.
The CSCO news should have brought this market down, but as usual, the market did not react as most would have thought. Yes, the NASDAQ was a sea of red today, but it could have been much worse. There were pockets of strength that held up this market today. Volume was below average on the Dow but above average on the S&P and NASDAQ. This above average volume on a down day looks bad, but it is a little deceiving because most of the volume came in during the recovery, not during the drop early this morning. This may be signaling that the institutions are coming back into the market. At this point, it is just a theory. We know the market can not hold up without institutional buyers.
Distribution
The market has drifted down for the past seven months due to the distribution of shares by the institutional investors. People have been taking there money out of the market, and with these outflows of cash, mutual funds have had to sell stocks to keep up with redemptions. When funds are selling, the markets will go down. The good news is that there is plenty of cash on the side lines to be put back to work when the time is right. When cash comes back to the market in the form of inflows to mutual funds, the cash will be put to work by these fund managers and the buying will start. When that will be is anyone's guess. All we can do is follow the charts and let them lead us to the answer over time.
The NASDAQ Chart
Tonight's chart of the NASDAQ shows the Fibonacci retracement levels. It is a three year chart with the Oct 2002 low of 1108 and the Jan 2004 high of 2150. The Fibonacci retracement levels are 38%, 50%, and 61%. These are areas on the chart where we may see a bounce and the start of a reversal or new trend.
Today the NASDAQ hit the 38% retracement level and bounced. As mentioned before, the NASDAQ could go down to 1650 before any kind of meaningful reversal. 1650 is almost a 50% retracement from the Jan 2004 high. On the chart, the 50% retracement would occur at 1625 on the NASDAQ. 1500 would be the 61% retracement area, and if the NASDAQ should drop that low, we will then need to load up on long positions at that point. This area represents the least risk and has a very good chance of holding up.
Of course, the unthinkable would be for the NASDAQ to form a double bottom (all the way back down to 1100). I do not think that will happen but anything is possible. If there is a double bottom, we will use 100% margin at that point as it should be the beginning of the new Bull market.
Bulletin Clean-up
We are getting ahead of ourselves with the thought of the NASDAQ going as low as 1100 so let's not think about that yet. That is still months away if it were to happen. The long watch list will be cleaned-up by removing any stocks that we are not long unless the chart still looks good. This will leave us with very few long choices, but it will also leave plenty of room to add stocks should we find any worth considering. In this market, I cannot find many stocks I would want to own. Cash is king for a little while longer. When the market is ready, we will be ready with our new list of hot stocks to buy. But for now, we will stay on the short side of the market until the trend reversal is confirmed.
OTC BB Watch List
- None
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