Tuesday, January 06, 2015

NASDAQ poised for a volatile day and maybe a recovery bounce

Monday was a day of transition for NASDAQ, being the first trading day after the slow trading of the holiday season. It was the first day with all of the big dogs and heavy hitters back at their desks after an extended holiday break. It was their chance to revise and even reverse any trading that occurred while they were at the beach or on the slopes. That said, my experience is that the very first day back from the holidays is not a great indicator of what lies ahead since everybody is trying to second guess and front-run what the deep-pocket players will be doing once they get serious. In fact, it might take another day or even two to finally clear the deck of this transition trading before we get to the real money movement that will characterize the next few weeks.

I think of December as a half month, with serious business taking a break on the 15th. In fact, the trading on Monday took NASDAQ back to almost exactly where it was on December 17th. So, we are back to square one, and now we can build a market that has the full team fielded.

I do see the hedge funds as being mostly in charge of the markets these days, so we will continue to see lots of heavy swings as they flip flop between "risk on" and "risk off". As I said, Monday was a transition day, so we don't yet what risk bias these guys will assume until they feel that they have cleared the deck.

Since Monday was such a strong move, today will be yet another transition day as people react to the reaction of Monday. Some people will be prepared for a recovery bounce, even if only a transitory dead-cat bounce, while others such as the perma-bears are assuming the worst.

Me, I don't try to bet exactly how the market will act on a given day, but instead simply try to be ready for all of the likely possibilities. I'd prefer an up day, but I also love snapping up bargains on dips.

NASDAQ is near the lower edge of its wider trading range supported by the September peak, so unless we really are headed for a solid correction or outright bear market the tendency would be for hedge funds to reverse and play the swing back to the upper reaches of the trading range.

NASDAQ futures are up moderately, indicating a moderate recovery pop at the open, but futures have been bouncing around and had been negative earlier, so the exact bias at the open is not cast in stone. As always, the bias at the open is not a great indicator of how trading will play out as the day progresses - we could see people sell into any opening pop to kickoff a new leg down in the sell-off, or we could see dip buying and people piling on to build a strong recovery rally. There are probably plenty of people short the market right now, so a strong enough bounce could cause a major short squeeze and short-covering rally, but that would not be a good indicator of how the market will trade in the days ahead since forced covering of shorts simply means the shorts will be waiting to pounce again in the days ahead.

In short, I wouldn't read too much into any market action today. I'd combine today and Monday as one transition trading period, and look to trading on Wednesday and Thursday as more indicative of the risk bias of hedge funds going forward.

Oil (OIL) did hit the magical $50 level, so I did buy some more. Exactly where the bottom is I do not know, but anywhere in here is a value opportunity.

I did do a lot of buying late in the day, the list is too long to give here - see my StockTalk feed.

-- Jack Krupansky

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