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Thursday, February 17, 2005
Market Recap
The double top scenario that I spoke about yesterday played out today as the markets reversed after the open and never looked back. After some brief strength at the open, the sellers took over and sent the Nasdaq lower by –26 points. The Dow finished down –80 points and the S&P closed lower by –9 points. All 3 indices closed right at their lows of the day as buyers were nowhere to be found once the markets indicated they would not be breaking into new highs for the year. Today's action is double bad news for the markets because the bears that were shorting the strength are holding, and the hopeful bulls had to sell when it was clear the markets were not going to breakout. The smart bulls knew that a failure to make new highs was a clear sell signal which puts both the bulls and the bears in sell mode. A recipe for some swift selling and that is exactly what we witnessed today. The question now is where will the markets find support? A double top does not necessarily mean that the markets are headed straight down. At a minimum, though, it does delay the bull from running strong because of the new overhead resistance that it must overcome.
The bulls will now be very cautious with their buys do to the double top pattern and bears will start covering only if the markets head back up and retest the highs. We now have a situation where even though the Dow and S&P are above their respective 50MA's, the market will have a bearish bias until the Nasdaq can join the S&P and Dow above their 50MA. One thing that could save everything is if the institutions step in and move some cash back into the markets because the retail investor does not have enough buying power to sustain any bounces that we do get. Participation from the “smart money” is vital or the markets will continue to bob and weave, making it very difficult to trade with consistency. The Russell index also took a decent hit today and, unless it bounces soon, it will be back below its 50MA. It is also looking like the bear flag on the Nasdaq chart is going to resolve to the downside. A move and close below 2040 will be our confirmation. If the Nasdaq closes below 2040, I think it is almost certain that it makes a visit down to the 200MA currently at 1981.
Looking Ahead
It is looking more and more like the markets are going to trade in a channel for a while, much like they did for most of 2004. I have a chart tonight of the DOW that will show you how I think 2005 could potentially play out if we have a repeat of 2004. Our hopes for 2005 were for the markets to break into new highs, sending the bull charging ahead. This obviously has not happened yet. Until it does, we will need to start taking a more micro view of the markets so that we can better time our trades to match up with the current direction of the market. My goal moving forward, in addition to finding the strongest charts, will be to identify specific levels of support and resistance on the indices that we can use as guides to know when the ideal time is to enter our trades.
If the markets are only going to give us a trading range then during these times we need to be more nimble and take profits quicker. I will be the first to admit that we have had some trades that we should have taken profits on a bit sooner. A 5% gain is better than a 2% loss because we were stopped out after the market reversed on us. Until the markets establish a clear direction, it will be very difficult to hit the “home run” trades. Please be assured that every time I step up to the plate to make a trade, I do try to hit a homerun. However, what has been happening is that I have been trying to stretch singles into doubles and doubles into triples only to get thrown out. My point is let's take what the market is willing to give us. If it is singles, then we will live off of singles until times get better. There are many players in the hall of fame that made their living hitting singles.
I apologize for the lack of charts tonight. After finishing one chart the annotation feature in Stockcharts stopped working. I will be sure to make it up to you on Monday.
Holiday and Reminder
There will be no bulletin on Thursday February 24th due to the fact that I will be out of town for that one day. I will not be available for trading that day either. No alerts or trades will be made that day. It will be business as usual on Friday the 25th.
Monday is a holiday for the markets so there will be no bulletin on Sunday. The next bulletin will be published on Monday.
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Earnings Calendar
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