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Sunday, May 01, 2005
Market Recap
Oil closed below $50 a share on Friday, sparking a triple digit rally in the DOW. The DOW closed up 122 points, the NASDAQ was better by 17 points and the S&P gained 13 points. This rally does nothing to repair the damaged charts of these indices. However, with oil now down below $50, if there is follow through selling in oil on Monday and it closes below $50 again, then this could be the spark that signals a reversal to the upside in the stock market. In addition, the Fed meets on Tuesday, and if they even so much as hint that they are close to being finished with raising rates, we could get a substantial rally that would repair the charts fast.
I do not believe that we have seen the bottom yet but if we have, we should be getting long with some of the stronger stocks in the market. Most of the big money is made off of market bottoms, when charts are ugliest. I am not saying that we are at the bottom but there are some signs that indicate we are close and others that indicate we have further downside to go. It is a mixed bag of signs right now but hopefully, the price of oil and the Fed will provide a clear signal next week. Tonight's chart of the NASDAQ shows some of these mixed signals. One of the bullish signals that I cannot show in the chart is that the percentage of stocks above their 200 SMA is now only 42% and those above their 50 SMA is now only 20%. When these percentages get this low, it tends to produce bounces and/or major market reversals.
Fed-up with the Fed
The Fed meets on Tuesday to decide on interest rates. A .25 rate hike is expected but what the street will be interested in is the comments following the decision. If they say they are done rising rates for awhile, we could get a powerful rally. However, I do not think the Fed will give away their hand and tell us they are through. If they were to do that, they would put themselves in a very tough position. If the market does not hear that the Fed is finished raising, then I think the market will continue its downward spiral. Do not forget, the charts of the indices are still in bear flags as well as many individual stocks and we have not had the panic sell off that normally signals the end of a downward move. The VIX is still not signaling panic in the markets.
Shorting the Strength
On Friday, the markets gapped up and rallied up in the first 30 minutes. I took some short positions because I did not believe in the rally. I was right for a half a day. Shortly after I took my positions, the market began to sell off. The NASDAQ broke below 1900 and the DOW went from up 75 points all the way down to quickly move into the red. These shorts looked almost genius for about two hours and then lightning struck and after lunch, and buyers came in and took the markets up for the rest of the day. Even with this rally, our shorts are still looking great. Their charts are bearish and if the market can close below 1900 and 10000, these short positions will make super moves down. A close below these levels will certainly bring in more sellers and we just may get that panic selling that we need to signal a bottom. As I have mentioned before, my downside targets on the DOW and NASDAQ are 9750 and 1750, respectively. These are the next levels of support and I think that we reach them if we close below the 10000 and 1900 levels.
Two Possible Reasons for Friday's Rally
The only explanation that I have for the rally on Friday is it was the last day of the month and mutual fund managers could have been dressing up their portfolios for their books, bidding up stocks to show better performance. Also, it could have been big money, positioning themselves ahead of the Fed meeting. Some may have covered their shorts ahead of the Fed, thinking that they will state that they will be passive in the future about raising rates. This short covering could have been the fuel for the rally. Others may have wanted this rally so that they can take new short positions near the close Friday and again Monday, ahead of the Fed's decision. This is likely because they are betting the market will sell off, should Fed state that they will continue their measured pace of rate increases.
It is hard to tell at this point, but I believe that we are short some of the weakest stocks in the market and if the market sells off, they could drop substantially further. If the market rallies, the upside should be limited for these weak stocks. Tuesday will be very interesting, to say the least.
GOOG the NASDAQ Leader
Ladies and gentleman, I have placed GOOG on our bulletin watch list for a long position, should the markets start to rally from here. GOOG has held up after its earnings report and has not weakened at all during the market slide. When and if the markets do begin the next phase of the bull market (after it bottoms), we will want to be in the market leaders with the strongest stocks for the quickest moves up. I believe GOOG will have a very nice move up, should the Fed stop its tightening process. Price wise, it is an expensive stock but it could get a lot more expensive if it explodes up, like I think it is capable of doing. The chart pattern certainly suggests higher prices are coming for this monster. Even though it seems expensive, it is relatively cheap on a price/earnings ratio when compared with the rest of the tech sector and therefore there is plenty of upside in those terms.
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