Thursday, July 31, 2014

NASDAQ poised to consolidate in its trading range

NASDAQ was poised to break out to a new near-term peak yesterday, but... "poised" is not a measure of certainty. It did pop very nicely at the open, but too many people took a "sell into any rally" bias and a significant portion of that opening pop was lost. An attempt to rally again later in the day failed to set a high for the day, which is always the signal that the rally is failing. Sure, we did manage to see a nice gain for the day, but it just didn't have the feeling of any real enthusiasm.
 
BTW, I was one of those people selling into rallies, but I am still overweight on a lot of these stocks. I had a lot of "extra" positions that I had bought on dips which had hit 5% or more gains, so they had served their purpose. I now have semi-decent cash reserves to get back to buying on dips.
 
NASDAQ futures are down sharply, on no particularly significant news. I wouldn't say that Argentina or Greenspan are great reasons for a significant pullback this morning. Rather, I think the failure of NASDAQ to break out yesterday is all the incentive that traders need to consolidate and test to see if NASDAQ is ready to trade back down deeper into its trading range.
 
And I'm sure that some people just want to close out positions so they can take it easy on Friday and head off for the weekend early.
 
There are also some option expirations occurring that can boost volatility.
 
That said, this will be a test – to see if people really are ready to reverse their bias and sell the market lower, or... maybe they will prove the traders wrong and buy into the dip. And then the big question is whether people pile on to any intra-day recovery rally or sell into it.
 
In any case, this is all "trading range" behavior, typical of slow summer trading.
 
Some people are also worried that a stronger economy means that the Fed will be tightening credit too severely too soon, which they fear will cause a major stock market correction. I'm not one of them, but I recognize that these people do exist and that their negative psychology may have an impact on the market. But anything that causes the stock market to rise at a more measured pace, albeit with significant volatility, is actually a good thing.
 
I'm not sure how I will play LinkedIn (LNKD) and Tesla (TSLA) into their reports after the close. I'm still overweight on both, even though I sold some extra dip purchases yesterday and last week to protect my nice gains. I'll wait to see how the stocks trade into the close. I don't plan to sell any more, but if either dips significantly into the close, I will consider buying an "extra" position. And I would certainly buy any big dips tomorrow.
 
I sold my "extra" position of Yelp (YELP) to protect a 7% gain. But now, I may buy it back if there is a deep enough dip. I'm not too overweight on it.
 
I sold more of my Facebook (FB) since I am still way overweight and I'm not sure it will rise too far from here before it dips again. I'd rather have a little cash for dip buys.
 
Ditto for Twitter (TWTR). It is a long-term holding for me, but I have to protect some of my profits as well as being prepared to take advantage of the frequent seemingly irrational dips.
 
-- Jack Krupansky

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