Wednesday, March 04, 2009

Another moment of truth: NASDAQ hanging by a thread near its November low

Repeating much of what I said yesterday... Although the Dow Industrials and S&P 500 continue to set new bear market lows, NASDAQ is still within a trading range, albeit barely. But, we are now at another moment of truth. NASDAQ closed at 1,321.01 yesterday, a mere 4.89 points above its November closing low of 1,316.12 on November 20, 2008 and with an intraday low of 1,312.98 which is only 17.50 points above the November intraday low of 1,295.48 on November 21, 2008. All we need to see is an 18-point intraday drop and a 5-point closing drop and NASDAQ will be officially out of its trading range with a new bear-market low. But, if the market were to turn around in the rough vicinity of these levels it could be a so-called "double bottom" which is actually a bullish sign. To be a true bear market, we would need to see a sequence of new lows (below the November lows) over the coming days and weeks. In any case, technically, NASDAQ is still merely on a downswing in a trading range.

I suspect that although the more doomish and gloomish of traders and short-term speculators would like to use the new Dow and S&P 500 lows as an excuse to take the market down further, there is a moderate chance that the "down" crowd will soon run out of cash for more bearish bets and soon begin to reverse and push upwards for a new trading range. They may decide to wait until the NASDAQ doom and gloom crowd hits "selling exhaustion", but that might actually have occurred at noon yesterday.

If too many people set up for a new NASDAQ low in the coming days, shrewd traders will "smell" the fact that too many people are "leaning in the same direction" and will set up for the reversal and kick off a massive short-covering rally. It should be really interesting.

Note that traders sometimes like to engineer "head fakes" like yesterday where they pretend to set up for a bullish move before the market opens to scare some of the shorts into covering, but then they sell into the early rally in the hope that it will fizzle, reverse, and head back down, which is exactly what we saw. Sometimes it works and sometimes it doesn't. They might try the same thing again today, although short-term speculators could sense their timidity and bet against them as they start the reversal and then kick off a somewhat larger short-covering rally.

Ultimately, we could be setting up for a triple-bottom for NASDAQ as some sense of euphoria for an eventual economic recovery builds a short-term bullish mood that runs for awhile but eventually fizzles within a couple of months as the near-term outlook continues with a track record of weakness and sends NASDAQ back to "revisit" the double-bottom area, but then maybe we actually do start to see a hint of a little light at the end of the tunnel to finally mark the bottom and kick off a true bull market. Note that the stock market is a leading indicator, so you would expect to see the stock market turn up before the economy actually does in a publicly noticeable manner.

In any case, best to give the market another week or so to sort it out and get past the euphoria of new Dow and S&P 500 bear market lows before concluding anything about the NASDAQ medium-term trend.

-- Jack Krupansky

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