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Tuesday, March 22, 2005
Market Recap
Based on the force of the selling, it was quite apparent that the sellers were going to rule the day, no matter what the Fed did with interest rates. The ¼ point raise came as expected and then shortly after the initial reaction, the sellers could not get to the exits fast enough as the markets took away whatever hope the bulls did have before the announcement. All 3 major indices closed at the lows of the day and did so on above average volume. The NASDAQ finished the day down –18 points, the Dow closed lower by –94 points, and the S&P closed down –12 points. Bad news for the NASDAQ as it closed the day below its 200SMA. I have mentioned many times that this is a critical long-term level that must hold up so we are now sitting in bearish territory, unless the NASDAQ can bounce and close back above this level in a hurry. The S&P and Dow are still above their respective 200SMA but a drop to them after today's action should not surprise us considering the state of the NASDAQ, which is normally the leader of the markets.
Looking Ahead
The NASDAQ closed below its 200SMA so it is time to load up on shorts, right? I hope that you already know the answer to this question, which is “No”. We cannot short the first breach of a key level, such as the 200SMA, because the markets are likely to bounce from this level. We need to wait for strength to start shorting stocks. Now you might be asking yourself, “If we wait for strength then the NASDAQ will be back above its 200SMA. We all know that it is more risky to short when the NASDAQ is above its 200SMA”. This is a very true statement, so what do we do? This will probably surprise most of you that my plan is to get long at this level. After looking at the weekly chart of the NASDAQ, I think the odds are very good that we will get a decent bounce from these levels, enough of a bounce that I feel comfortable putting some cash to work. I believe one of three things will happen tomorrow. The first scenario is that we gap up at the opening bell and the NASDAQ moves and closes above the 2000 level. The second scenario is a gap down, followed by hard capitulation selling that takes out all levels of support, making everyone feel like the market will never recover. The third scenario is a dip and run. This is the ideal situation that we need to take advantage of, if it does occur. The plan would be to enter stocks during the weakness at the open and then move stops up to our entry, assuming that we do get a bounce. Of course, we do not know if the dip will be followed by a run so tight stops will be used on any positions that I plan to take.
My plan is to buy only if we get some mild weakness at the opening bell. I will not chase a gap up and I will not buy if we gap down. There is a very good chance that I would not buy any stocks but I want everyone to be prepared in case we do get a dip. Of course, there is always the chance that we get a dip followed by more selling. This is the one scenario that we will have to be prepared to sell quickly for small losses and move out of the way of the market. To help protect ourselves from this scenario, we need to only buy stocks that are above long-term support levels and that are in up trends. No bottom fishing. I do not have the exact list of stocks that I plan to buy but I will be sending out an alert sometime later tonight or first thing in the morning, ensuring that you will have plenty of warning to buy the stocks if you so choose. I plan to spend the rest of the evening picking the best stocks from the bulletin and also looking for new stocks that have held up the last couple of days. I believe 2020 is a realistic and conservative target that we can use to sell our longs and start entering short. These trades may only be 1 or 2 days before we lock in gains because we have to remember that the chart of the NASDAQ is still in a short-term downtrend. Our goal with these longs is to make some gains over a 1 or 2 day period while the market bounces. I will be locking in gains quickly.
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