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Sunday, March 27, 2005
Market Recap
Thursday, the markets looked like they were going to shrug off the Fed as they rallied up all morning and by 12:30 the Dow was up 65 points. Then the sellers started to show up after lunch and the gains slowly dwindled. At 3:00 PM the bottom fell out and the market sold off into the close, leaving the Dow red for the day and down 13 points. The NASDAQ had held above the 2000 level all day until the last hour, when it to gave its gains back and closed up less than a point. The NASDAQ closed below its 200 SMA with a bearish candle at 1991. The S&P was down 1 point with the same ugly candle as the NASDAQ and Dow and all three of these indices closed at their lows of the day. We bought some stocks last week expecting a temporary bounce and got the bounce as expected, but it was much shorter lived than I had anticipated. The sellers are definitely in control of this market at this point and it does not look good for anyone long the market. Tight stops are in order and below in the market out look segment, you will see why.
The Market Outlook
Dow
If you look at the weekly chart of the Dow that I have for you tonight, you will see that we are in a trading channel between 11000 and 10350. On a daily chart this is a big swing, but on a long term weekly chart, this is only a 650 point range and that is not large considering the weekly time frame. The Dow closed last week at 10442 and although bearish on a daily chart (short term), it still remains bullish on the weekly chart. The 50 week moving average on the Dow is 10352 and which corresponds with some price support as well. On the daily chart, the 200 SMA is 10376 which will also act as support but that is still almost 100 points lower and therefore has the potential for more down side before we get any bounce. Do not give up on the bull market just yet. Although it looks grim right now, we are still in a long term uptrend until the Dow closes below its 200 SMA on the daily. When and if that happens, watch the weekly chart. If there is a close below the 50 SMA on the weekly chart, it will be the kiss of death for any chance of a bull market in 2005.
The S&P
The S&P 500 is in the same position as the Dow. It broke support at 1185 last week and is now trying to find support near 1160. More importantly, the 200 SMA is 1150 on this index and that must hold up or the bears will be partying like there is no tomorrow. It is in this area that I would expect a big bounce. Of course, if oil keeps rising along with interest rates, any expected bounce could be limited.
The NASDAQ
The NASDAQ is in a more troubling situation than the other two indices right now. After two months of consolidation between 2000 and 2100, it has broke through support at the 2000 level and also, as mentioned above, it closed below its 200 SMA for two consecutive days in a row to end last week. In my opinion, this is signaling a primary trend reversal and being long this index right now is not the best choice. It is very possible that this index could test a long term support area in the 1750-1775 range and that would be quite a drop from current levels. Keep in mind that if a drop like that would occur; it would be about a 10% correction from here and would still not break to long term uptrend. In bull markets, it is common to have corrections of up to 10%. These corrections are considered healthy and needed before any meaningful advance can occur. I have a weekly chart of the NASDAQ tonight so you can see what I mean. Unless there is a reversal back above 2000 sometime real soon, we can expect the NASDAQ to test the 1750 level this summer. Right now, the primary short term trend on the NASDAQ is down and this could drag the other indexes down with it.
What the Fed Said
As you already know, the Federal Reserve raised rates by another quarter percent last week. In the statement that followed, they indicated that inflationary pressures are rising and hinted at future changes to their outlook from “measured” to a more aggressive stance. Further rate increases will not be good for stocks and it looks to me that the charts of the big three are forecasting what is to come and it looks like falling stock prices.
History of Tech Performance
For what it is worth, history has taught us that the best time to be long the NASDAQ (tech stocks) is between October and April. This is when they perform best and provide the best returns. However, it did not prove to be true this year. History has shown that March is also a very good month for stocks but again, not this year. This is based on historical returns only so do not put a lot of weight into it. I continue to believe certain stocks will out perform no matter what the market conditions are. We just need to find them and right now some of the stocks from our day trade lists are moving up nicely and out performing the market.
Earnings Coming Up Soon
Earnings are coming up in April for the first quarter and it is my opinion that they will be good overall, however, if a company does not have an earnings surprise and beat the street substantially, I believe it will be a case of sell the news. With this in mind, make sure that you know when earnings are for any stocks you own.
Day Trading
Day trading continues to be working out well for those that can actively watch their stock trades daily. I will continue to post some possible day trades to our message board until we can find a clear direction for the markets. Short term is down, but long term is still up. When this happens, it is tough to decide whether to be long or short this market. I have added some possible short selections to the short watch list tonight. Given the outlook right now, be cautious with your trades. There is nothing wrong with being in cash at this time.
For New Members
For all of the new members with us, please make sure to read the link “How to use Bulletin” at the bottom of the Bulletin page on the website. It is critical that you know how to use this trading tool before trying to trade the stocks mentioned. The effectiveness of your trades will diminish if you do not completely understand how the information is presented.
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Earnings Calendar
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