On Friday, the markets reversed right when NDX tagged the January 2006 highs, an old foe (1761.46), but the DOW and SPX managed to end the day slightly above their respective 10 DMA's. NDX and COMP failed to do so and are once again the laggards.
I had mentioned a few times before that QQQQ would probably head down and close the November gap at 41.90. It's pretty much the same for NDX, except that QQQQ has some after-hours action and the chart is not as clean. As you can see, NDX briefly went into the November gap on March 5th (low of 1710.97), but never quite closed it. However, since we were near the 200 day exponential moving average (1714.85), it was good enough to call it a bottom for the week. Always track this index, no matter what equity group you are trading.
In keeping with this emphasis, the battleground is very clear with resistance at 1760 and support at 1704. Should we break above 1761, we will move up to 1782/1788, 50% and 50 DMA, negating the current bear flag. A close above that on volume would dissipate many fears and put more money to work on the long side. A drop below 1704 sets up a likely test of October lows (1623). Trade the rest of the market accordingly.
Option expiration week is upon us. Max pain for NDX is at 1800 (...Feb monster gap) and we have a boatload of puts before. Link. As noted yesterday, ISEE hit a 52 week low, even lower than last year's sell-off in terms of call to puts (the ratio is reversed with ISEE, a low number means more puts). But I also noted that investor bearish sentiment is not high enough to call a reliable bottom, and therein lies our quandary: lots of put support (excess bearish speculation) that is not translating in enough pessimism longer term to be as reliable an indicator as it was last year. Confusing? you bet. What this means is that we should see an unwinding of the short term bearish plays as we try and rally some more, which would eventually create the set up for a much deeper correction and foster a truly excessive bearish environment, one that would enable a more sustainable bottom to form.
One caveat: the sentiment numbers will be updated next week and if bears did indeed shoot up much higher, the current analysis must be adjusted. There is always an outside chance that Monday was indeed the bottom, but I would not count on it. Heavy damage was inflicted on the psyche of many investors and that is not easily reversible.
There will be more "rate cut" spin as funds try to recoup losses (and possibly get out), but don't fall for that one as long as inflation remains on Bernanke's radar. The press is always reporting "benign inflation" and "steady growth" (they are still stuck in the 90's), but what we could be experiencing is steady inflation and dwindling growth. If that is the case, equities will struggle for some time.
This entry was posted
on Saturday, March 10, 2007 at 3/10/2007 08:30:00 AM.
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