Friday, October 17, 2014

NASDAQ poised for a decent dead-cat recovery bounce

As I had suggested, NASDAQ is searching for a base here. Neither the actuality nor the outlook for business or economic fundamentals of the U.S. economy has changed significantly over the past month – this entire "correction" is entirely "technical", a short-term "move." Hedge funds saw an opportunity to move the market and took it. Now that "move" has run out of steam, or so it seems, and traders and short-term speculators are jockeying to determine how real and definitive the emerging "base" really is.
 
By my own calculation, NASDAQ just barely "touched" a 10% decline from the 2014 peak on Wednesday and then again on Thursday at the open, but in both cases there was an immediate recovery bounce, strongly suggesting that this "correction" is 100% a contrived "technical" move rather than based on fundamentals. Traders and short-term speculators may still try a couple more times to break below that 10% "correction" level, but I suspect that this "mini-correction" swing has mostly run its course. I can see from a lot of my own stock positions that there was a lot of dip buying for the smaller popular momentum stocks, even as the larger-cap big names were weak.
 
NASDAQ futures are up sharply this morning, indicating a nice bounce at the open, but as always, the question is whether people pile on to that initial pop to build a dramatic short squeeze, or whether people sell into the rally in an attempt to test the durability of this emerging base.
 
It's also a Friday, so short-term speculators will tend to close out positions in advance of the weekend when anything can happen. In this case we could see buying if people are net short the market.
 
Whether any recovery bounce today manages to stick through next week remains to be seen. That's why they call it a dead-cat bounce. I think it will, but even for me that is a 50/50 proposition. But I've placed my bets based on my expectation that if we aren't at the bottom, then at least it is relatively near.
 
I suspect that my dip buying has run its course for this "correction." Now the question is which dip positions I sell for a 5% gain, a 10% gain, and a 15% gain, vs. keep as part of my long-term investments.
 
-- Jack Krupansky

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