NASDAQ consolidation at a moment of truth

The sell-off of NASDAQ on Friday was finally a healthy amount of consolidation and will help to provide a solid region of support for a further advance above 5000. That is not to say that the consolidation process is either over or even near over, but it is healthy nonetheless.

The next two weeks could have an extra dose of volatility as people try to position themselves ahead of the Fed FOMC meeting next week on the 16th and 17th, and then react to that meeting, and then recover from the reaction in the few days after the meeting. The Fed is likely to remove the patient language from their statement, which means that they will have the flexibility to begin raising rates in June, although fed funds futures still indicate that September is the more likely time frame for liftoff, even after the strong jobs report on Friday. IOW, the sell-off on Friday was more about the ongoing consolidation in the market after the recent advance rather than a specific change in the Fed rate outlook.

NASDAQ futures are up moderately, indicating a moderate rise at the open, probably based on a feeling that NASDAQ over-sold on Friday and is due for a bit of recovery bounce, even if it turns out to be a classic dead-cat bounce. As always, futures and the opening move of the market are not reliable indicators of the trend for trading.

The consolidation is at a moment of truth. There are three highest probability outcomes for today, all with roughly equal probability. First, the consolidation has run its course and Friday was a last gasp, and a recovery and continuation of the recent advance is in order. Second, enthusiasm for a short-term rise above 5000 has evaporated and a deeper trading range and downward swing are a more appealing trajectory for the hedge funds, who are less wed to a specific market direction than they are to playing volatility in terms of swings within a wide trading range. That is not to say that NASDAQ 5000 is out of the question, but simply that a zig-zag path to that goal is preferred by hedge funds. And third, volatile trading in a relatively narrow trading range as the consolidation drags out as the path of least resistance as people lean towards a more neutral risk bias as they wait for Fed guidance next week.

-- Jack Krupansky