Friday, April 17, 2015

NASDAQ still stuck at the crossroads

The good news is that NASDAQ has now managed to close above the magical psychological 5000 level for two consecutive days (again, for a second time). The bad news is that upwards momentum was relatively weak when we crossed above 5000 and has now completely evaporated. That can mean only one thing for swing traders - time to reverse and bet on a swing back downwards in the wide trading range. Sure enough, NASDAQ futures are down sharply on no particular fundamental economic or business news. There is no guarantee that a renewed downwards swing will occur, but you can't blame traders for trying.

It is also a Friday, so some decent fraction of short-term speculators will tend to close out positions ahead of the weekend when anything can happen. This means selling if they are net long, or buying if they are net short. Given the weakness of the past two days, which may have been due to some short-selling on weak upwards momentum, a rally off any opening low is a distinct possibility.

Given the lack of a fundamental cause for the sharp decline in futures, we could see a decent recovery rally from any morning low.

OTOH, given that the hedge funds remain in charge of the market, everything hinges on whether they decide, on net, to flip the switch and shift to a risk-off bias and bet on a downswing in the trading range, or whether they buck that trend and raise the ante for a risk-on bias and kick off a big short-covering rally by catching the more bearish traders off guard.

As always, we must be aware that futures and the open market move are not reliable indicators of the trend for the rest of the day.

Personally, my primary trading strategy is still based on playing big dips on individual quality stocks, so a decline here works to my benefit.

A correction? The permabears are ALWAYS forecasting corrections, so that's not really a forecast per se.

Volatility will remain king.

The real wildcards are retail and institutional investors, like pension funds, who must decide whether to pour more money into the stock market or take some out. A fair chunk of those fund flows are targeted at hedge funds, which have a very wide mix of strategies and an everchanging risk bias, so that even increased inflows don't necessarily mean a bullish stock market move on any particular day. Volatility thrives in this kind of environment.

In short, NASDAQ remains at a crossroads, with equal probabilities of another leg up in the longer-term advance, a swing back downwards in the trading range, or lots of volatility in a narrower trading range.

-- Jack Krupansky

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