Wednesday, January 07, 2015

NASDAQ to take another shot at a recovery bounce

Okay, I think we finally have the deck cleared and most of the big dogs and heavy hitters are back from the holiday break, limbered up, and ready to make a serious move. Whether that move is up or down I do not and cannot know. Sure, the bias of the hedge funds was clearly "risk off" for Monday and Tuesday, but that could simply have been a "setup" to position the market for their ultimate bias that they will choose today. Sure, they may indeed retain that "risk off" bias, but they are just as likely to reverse to a "risk on" bias, especially since NASDAQ is sitting at the low end of its trading range.

NASDAQ is positioned a little below its September peak, but more than a percent above the December trough. That's an okay place to be. I wouldn't be surprised if traders and bearish speculators took another shot at firming up a bearish trend below the December trough, but it is just as likely that hedge funds will take the path of least resistance and play the range trade by reversing to a "risk on" bias and let NASDAQ trade back towards the upper edge of its trading range.

Although NASDAQ futures are indeed priced for a big pop at the open, history has shown that although the futures reliably indicate the opening move, they are a rather unreliable indicator of how trading will trend as the day progresses, as we saw last Friday with a big pop at the open that reversed and turned into a loss for the day. Or the moderate pop at the open yesterday - we know how badly that movie ended. So, prepare to flip a coin as to whether people pile on to the initial pop for a significant short-covering rally, or whether they continue to sell into rallies as we saw yesterday.

I suspect that traders are indeed attempting to incite a short squeeze, where a sizable fraction of the bearish speculators are forced to buy to cover their short position due to "hitting their stops" as the market rises against them. And as they do that buying they only push the market higher which causes even more "short stops" to get "busted", causing even more "forced buying". Rinse and repeat. A classic Short-covering rally. It's happen before, so it could indeed happen today. Or not. It's a possibility but not an absolute certainty. The bad news is that a short-covering rally is not by itself sustainable since the shorts simply wait for the dust to settle and only come back with a vengeance on another day. The real question is whether enough hedge funds reverse their bias to "risk on" to play the trading range.

Overall I remain bullish and fully invested, but still cautious and with reserves to exploit any dips.

Oil (OIL) may not have set a true bottom yet, but it's a real value here, so I will continue to buy 5% dips.

I remain prepared to do more dip buying if the market does continue to head south.

-- Jack Krupansky


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