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Sunday, April 24, 2005
Market Recap
Last week was a wild volatile week in the markets. After trading with a modest upside bias on Monday and Tuesday, the indices experienced a sharp downside reversal on Wednesday. This reversal came despite solid earnings from INTC and YHOO. Wednesday's session was brutal for the bulls, however things changed quickly on Thursday when the indices had the biggest rally of the year. The roller coaster ride continued on Friday with selling that took the DOW down 140 points during late afternoon trading. In the last hour, bargain hunters and/or short covering, took the DOW up 80 points to close at -60 for the day. The NASDAQ lost 30 points and the S&P lost 7 points on Friday
It was a week that you would like to see if you are a trader because volatility is how money is made from a stocks movement. However, I am glad that I was away for the week because trying to trade a market that has great news one day and bad news the next and swings of over 100 points can also be painful to many as they get whipsawed on every trade and stopped out with losses, only to have their positions rebound. It was great day trading activity for sure, but not for the swing trader.
DOW 10000
10000 on the DOW held up after the big sell off last Wednesday. The low was 10012 and on Thursday, the DOW gained over 200 points in a massive snap back rally. The round number of 10000 is a strong psychological barrier and gives the DOW some good support but should it fall below that level, look out below. A close below 10000, coupled with the fact that the DOW is already below its 200 SMA, will cause another round of selling which could be to the point of panic selling. A close below 10000 will likely lead to the next support level of near 9750. I still remain bearish and will not put new money to work on the long side of this market, until we see some buying conviction. The reason that I am not putting new money to work long is because I think that the DOW could easily retest 7500, the March 2003 low, if this market is indeed the real bear market I think that it may be. Even with the great earnings releases out so far this quarter from INTC, AAPL, YHOO, GOOG and many others, this market is still unable to break the downtrend. If these super earnings cannot move the markets up, that is a telling sign, in my opinion. I believe support at 10000 will fail and that shorting this market into strength is the way to make money, at least for the time being. Hopefully, the market can form a bottom here and start to move up, but without the fear in the VIX, I cannot see a bottom forming yet.
Market is a Forward Looking Vehicle
The primary trend on the NASDAQ continues to be down, even with great earnings so far. I have said this before and I will reiterate tonight, I believe that the NASDAQ will eventually reach 1750 over the summer months. If that support line cannot hold up, while the DOW falls to 7500, the NASDAQ will head to 1250. I am not trying to worry anyone with these predicted levels but if I am right and you are still long, your portfolios will suffer serious reductions in value. Remember, it is safer to play “not to lose” than to try and fight the trend. I do not like to be bearish but given the situation in the charts of the indices, I have no other choice until things improve. Hopefully, the 9750 and 1750 levels will hold and we will not even have to think about the doomsday scenario.
The question remains: if earnings are decent, why is the market still acting sluggish? The simple answer is the Fed and their actions concerning interest rates, the economy, and oil pricing tend to overshadow the great earnings. This is because the market moves six months in advance and projects ahead of time. Most leading economic indicators are suggesting that the economy will slow later this year. Meanwhile, the Fed remains firmly in tightening mode. Clearly, this is not the best formula for continued profit growth in the second half of this year. In addition, much of the earnings growth in Q1 have been from deep cyclical companies which are likely experiencing peak earnings for the cycle. Since we know the market is a forward looking vehicle, I think it is safe to say by the action in the market, that good times are not around the corner like many would want us to believe.
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