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Wednesday, January 05, 2005
Market Recap
Houston, we have a problem. The selling continued in this bloody market and today we saw the Dow close down again for the third day in a row, losing -32 points and closing at the lows of the day. The S&P lost -4 points, but the worst news today came at the end of the day when the NASDAQ closed below its 50 SMA. It was down -16 more points and closed at the lows of the day as well. The selling in the last three days seems to be for real and should not be ignored. With volume on the heavy side, this could be big institutional distribution and if that is what it is, we need to get out of the way and fast.
The Dow and S&P are still above their respective 50 SMA lines, so all is not lost. These two indices could bounce at that level and take the NASDAQ back up with them. Also remember, although a close below the 50 SMA is bearish, markets often over shoot to the downside when correcting, this is called an over reaction and with the markets in extremely over sold mode right now, a bounce is over due. Having said that, we cannot ignore the down volume the past few days and extreme caution should be used when trading.
Remember, there are times to be in the market and trading full strength and there are other times when it is best not to force trades. I know it is a new year and people are anxious to get started with 2005 trading, but believe me, patience is warranted until a clear direction is determined. Right now, we are 85% cash with only 3 open positions. We have been cautious for a reason and the last three days, you have seen why.
Charts Are Damaged
Many charts have technical damage and that is to be expected after three days of heavy selling. Remember, for short term trades, we use the 9 and 33 EMA to determined support levels. Most charts have fallen below these lines and that is a short term technical sell signal. Although I remain bullish longer term, we cannot ignore this short term sell signal. For the longer term, we use the 50 and 200 SMA lines and most stocks remain above these lines, so that is still technically bullish. Please understand the two durations. We are bullish longer term for now, but most charts look rather bearish in the immediate short term. Best thing to do is to wait for opportunity and that is what we will do with our large cash position.
Blame the Fed
The selling seemed to subside today until late in the day when the market caved in for another round of selling, resulting in another big down day. As I mentioned yesterday, the Fed had a lot to do with yesterday's selling and some of that spilled over into today's session. They came out with a statement about the risks they see in regards to inflation. They want to stamp that out quickly by raising interest rates and they have done so over the last few quarters. Mr. Greenspan has stated that they are raising rates in a slow controlled manner to ensure that inflation stays in check. But the latest statement from the Fed yesterday is a bit off track from their previous stance and that has many investors spooked. This statement came from out of the blue and caught many by surprise. It seems to me like the fed may be almost in panic mode themselves and felt they needed to put out an emergency statement to slow things down somewhat. It just seems a little strange to make these comments right as the New Year starts.
Oil Prices Falling, But Is Oil Really Getting Cheaper?
A weak dollar could be the culprit and has perhaps exacerbated the issue. A weak U.S. dollar makes imports more costly. We import a lot of oil, and the weak dollar makes oil more costly. Even though oil prices are falling from there highs, if the dollar falls at the same time, then oil is really not getting much cheaper. The Fed may be looking at the weak dollar and determining that oil is still very costly despite what most uniformed average hard working American people seem to think of the recent relief at the pumps.
Cautious Buying Near Support
I believe the markets are overreacting to the fed statement. I still believe we are in a bull market. As long as the trend is up, we should be trading in the direction of the trend. Periods of consolidation before the next move have to occur before markets can continue in the direction of the trend.
In bear markets, there are always relief rallies or dead cat bounces from over sold levels. Stocks will rally back up to resistance points. It is at these resistance points that we should sell the market short and ride stocks down through the new low. That resistance could be price resistance, moving average resistance, or trend line resistance. If it is trend line resistance, the stock will not make it back up to the previous high, and the result is a lower high. These lower highs and lower lows will establish a trend line. I mention bear market trading tonight because in bull market trading we will have the same things happen, only in the opposite direction. We will see pullbacks to price support, moving average support and trend line support. When these pullbacks to support occur, it is the time to buy or add to positions, providing the trend is not violated. Our stops were taken out yesterday and this was to ensure that we are protected in case this selling is more than just an overreaction. We used some of the freed up cash to buy some stocks today at support levels with limit orders. We will keep tight stops in place on these new positions as well just in case this is more than just a common bull market pullback.
Earnings Season Here Again
Earnings season starts again next week, with a couple of big cap tech giants announcing, including INTC and AAPL. Their earnings could have an influence on market direction, at least in the short term. AAPL's earnings should be super because of the Ipod sales numbers over Christmas. The question is, what will be the guidance now that the rush to buy an Ipod is over? Will it be a sell the news situation? For INTC, it is hard to tell how their numbers will be. It seems they change from one quarter to the next. One quarter they will say everything is wonderful and the next quarter they will give us some disappointing news. Just remember to know when any of your stocks report and know that you are at risk if you hold them into earnings.
Yahtzee!
What a great call by member “Idle Clocks” and “Rick” on our message board today. Even though the market was down, some members were able to capitalize on posts about ONT at 3:00 pm when the price was around .70 one hour before the close. After hours, there was a news release and the stock traded up to an after hours high of 1.78, up well over 100% in less than 90 minutes. What a great call and I think I speak for all our message board readers when I say thanks for the heads up and opportunity to buy the stock. I did not buy the stock but many of our members did and they appreciate your post very much I am sure. Whether it is a TWPD post or a post from one of our valuable members, the TWPD message board is a great community of some of the best traders around all looking and sharing some great plays. Congratulations to all who participated in this big winner. This was one of those Hall of Fame type trades that makes you want to stand up a yell “Yahtzee!” when you catch one.
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