Monday, August 18, 2014

NASDAQ set to take another shot at breaking out of its trading range

NASDAQ opened with a solid run at the upper edge of its recent trading range on Friday, but fell a bit short, like less that 5 points, and then wavered a bit before throwing in the towel. People blamed news from Ukraine for the intra-day sell-off, but that was just traders using a little non-news as a cover for their underlying intentions. As it turned out (with no new news), NASDAQ bounced back and scored a modest rise for the day. It was disappointing that the breakout run failed, and that is a yellow flag here, but none of this is necessarily definitive given that here we are in the summer doldrums of late summer slow trading.
 
Friday's trading pattern is also consistent with the trader's model of "filling the gap", where traders believe that trading must eventually trade back down to "fill" any "gap" left by a big rise (or fall) at the open. Trader's managed to do exactly that, which then opened the door for the bounce and moderate gain for the day. In that sense, this was a bullish signal.
 
The main yellow flag from Friday is that people didn't pile on to the pop at the open. There was a little bit of selling into that rally. People did try a couple of more times to rally for that last 5 points to a new high above the July near-term peak of 4,485, but ran into significant resistance. Not a good sign. So, we have mixed signals.
 
NASDAQ futures are once again up moderately strongly this morning, indicating a significant pop at the open. Once again, the big question is whether people will pile on to that opening rally and kick off a significant short squeeze and push NASDAQ up the 21 points needed to set a new near-term peak, or whether people will mostly just sell into the rally. And even if a new near-term peak is reached, will it hold and extend those gains. If not, we could be setting up for a "double top", which is a more bearish sign and the prelude to trading back down towards the bottom of the trading range again.
 
As I said, none of this is really definitive during the slow summer doldrums trading. Regardless of where we end up come Labor Day, the market will "adjust" by the end of September as the bulk of traders and speculators get back to their desks after a lazy summer and start placing bigger bets on whatever trend they think is emerging. The big question is whether they will be taking more of a "risk on" or "risk off" posture, especially going into October when the Fed will officially end its QE2 buying program. That could cause some significant volatility, but I suspect that it will all be a wash come November, when people will resume placing bets on the actual underlying U.S. economy, which continues to incrementally improve.
 
Some people continue to express great anxiety that the Fed will aggressively raise interest rates in 2015, but there is no sign or even chatter of that possibility coming from the Fed itself.
 
-- Jack Krupansky

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