Saturday, January 17, 2015

Has NASDAQ bottomed?

It is indeed too early to tell, but Thursday and Friday together seem to point in the direction of a near-term bottom for NASDAQ. The index fell 15 points short of hitting the December trough. That's a mixed bag. It's a good sign that try as they might traders and speculators simply weren't able to break down below that previous low. But... this was trading on a Friday ahead of a three-day weekend, so you can't depend too much on market behavior on such a day.

The NASDAQ-100 (QQQ) and Triple Q (TQQQ) did set new lows slightly below the December trough level, so on that score we're on solid ground to continue an upswing back towards the upper edge of the NASDAQ trading range.

Thursday had a little bit of a feel of throw in the towel capitulation at the end of the day. But a little may not be enough.

Friday was poised to to have a decent degree of capitulation with futures down sharply after the close on Thursday, but futures gradually recovered so that NASDAQ opened down only 4 points. I would have been happier and more content to call this bottom if NASDAQ had opened 20 points lower and fell another 50 points before a sharper rebound. Of course, we have to take the market as it is, not as what we want it to be. So once again we had a mixed bag on Friday, not as positive a sign as I would have hoped, but not bad news either.

A good portion of the bounce on Friday may simply have been the forced buying of a short-squeeze short-covering rally. IOW, the buyers were simply closing out short positions to protect profits or limits losses rather than outright betting on the future trend. But just because we had a short squeeze does not tell us whether it was the result of a one-day event or a true change in bias of the hedge funds. I'm betting on the latter, but not with tons of confidence.

Given that Thursday and Friday had that halfhearted feel to me, I'd say that there is a coin flip chance that we could see another move down for NASDAQ before it sets its final low for this swing off of the December peak. But that also means there is a coin flip chance that enough of the hedge funds will decide to protect their gains from shorting the December peak and flip the switch to go from risk-off to a risk-on bias to play the swing upwards in NASDAQ's trading range.

The recent slump is not a full-blown correction - we're only 3.75% off the December peak, what I would call a mini correction, so all the normal rules about capitulation are not in full force. IOW, sure, various trading rules and trading patterns apply, but just not so rigorously. Yes, the rules apply, but don't depend on them to be enforced by a squirrelly market ruled by a wide range of hedge funds all marching to the beat of a different drummer.

Monday is a trading holiday, leaving us with a shortened week which only further undermines all traditional trading rules and trading patterns.

Flip a coin whether NASDAQ futures will be up or down Monday evening, flip another coin whether futures flip-flop early Tuesday morning, flip another coin whether futures are up or down shortly before the open and at the open, flip another coin for whether futures head down or up after that opening move, and flip another coin for whether NASDAQ closes up or down for the day. Literally, these are each independent events. In truth, I wouldn't venture a bet which direction NASDAQ will head on Tuesday, in particular because it will be prone to give up some of Friday's gains, while also having the prospect of attracting money emboldened by the sharp bounce on Friday.

If NASDAQ does open weak on Tuesday, there is a fair chance that the hedge funds and other bearish speculators will sense blood in the water and kick off a renewed round of selling that could completely wipe out Friday's gains, and then some. We've seen this happen before.

Personally, I would expect there to be some intraday weakness on Tuesday as the bears test the durability of this nascent advance. If futures are down before the open it will also likely be part of a test rather than an outright bet on the trend for the whole day. There is frequently a disconnect between futures in the pre-market and the direction of trading for the rest of the day.

I wouldn't be surprised if we have a modest to moderate loss on Tuesday and I would not consider that indicative of the true trend given the sharp pop on Friday. But if we have a couple of days of weakness or mediocre advances (like 25 points or less), the bears will sense weakness and take another run, as we have seen many times in the past.

It will be quite important for NASDAQ to preserve the psychologically important 4600 level and the 4592 level of the the earlier January trough. If both of those go then NASDAQ will likely head south for another test of the bottom we set on Friday, and the December trough after that. That's not my expectation, but that's  what would be in store if NASDAQ sheds 30 points or more on Tuesday or Wednesday.

In any case, we are completely at the mercy of the bias of the hedge fund traders, whether they choose to flip the switch and go more risk-on or go more risk-off.

Even if hedge funds do continue to flip the switch to the risk-on position there is no guarantee that NASDAQ will travel the full distance to the upper edge of the trading range, let alone kick off a new up-leg to a new 1-year high above the December peak. There is indeed a very good chance that will happen, just that it's not guaranteed. Some renegade hedge funds might decide to jump ship early this time and send NASDAQ back down short of the 4800 level.

Welcome to an anything-goes market.

In any case, I do think there is a solid chance that Thursday and Friday was the low and turning point for this down-swing and that we are headed for a January high with a new 1-year high to follow.

-- Jack Krupansky

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