Tuesday, October 07, 2014

NASDAQ still trying to test whether the current trading range will hold

Monday's trading for NASDAQ was a perfect example of what the day after a big short squeeze looks like – traders start the day with positive sentiment which quickly runs out of steam because the previous day's buying was mostly short covering, and then sentiment flips over and runs negative for the rest of the day. Today the opening sentiment complements that euphoria, starting out negative mostly because the previous day ended on a down note. This is all typical volatility that one finds in a trading range.
 
NASDAQ futures are down moderately, suggesting a dip at the open, but whether people pile on for a bigger sell-off or start buying into the dip is not predicted by the futures (they should offer a post-futures contract for that!). We could in fact see a bigger dip in the morning, and then a significant recovery from that dip, or at least a modest bounce from the dip late in the day, or... this may morph into a throw-in-the towel sell-off right into the close.
 
Another factor is that since there was a large opening "gap" on Friday, traditional traders will feel a moral obligation to "fill the gap", by selling off until NASDAQ has traded down to completely erase Friday's gap, and then we will be back to square one. A bounce would likely occur at that point, but is not preordained.
 
All of this is mere trading range behavior and has nothing to do with the state of the U.S. economy or the prospects for American businesses over the coming year, which is all true investors should care about.
 
Ebola, geopolitics, the Fed meeting later this month, kicking off the quarterly reporting season, etc., etc., etc.? They are all just noise used by traders as cover for their underlying technical (not fundamentals) sentiment.
 
But by the end of the day we may get a better read as to whether the current, broader NASDAQ trading range will hold up.
 
-- Jack Krupansky

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