Monday, May 18, 2015

NASDAQ poised at another crossroads

NASDAQ remains stuck in a persistent pattern of maintaining a short-term trend for only a very brief number of days before morphing to yet a new pattern. We managing to rally up to the rough vicinity of a new high on Thursday, but here we are now on Monday morning with people in a sour mood expecting the worst. My usual analysis seems to still fit the bill, namely that NASDAQ remains mired in a wide trading range, with alternating swings up and then down. So, extending the mediocre market sentiment from Friday, this morning people seem poised to bet on a move downwards in the trading range.

That said, there is always the strong possibility that the futures trading is a head fake, designed to get traders mis-positioned, and to then revert to a renewed move upwards during the remainder of the day towards a new high in the trading range. Whether such a scenario comes to fruition today is unknown, but is is a distinct possibility.

It is also very possible that the recent advance will continue to unwind, taking us down more towards the middle of the trading range of 4850 to 5100.

Its really all up to the hedge funds, whether on net they decide to take more of a risk-off trading bias or more of a risk-on bias. Individual firms may have very strong feelings one way or the other, or not, but this is a sum of all curves phenomenon, where we need to add up all of the individual actions of all of the individual actors and see how that nets out. Of course we can't actually physically do that, but ultimately we have to approximate that as best we can. Ultimately, these guys are simply trying to maximize their profits, so it is mostly a matter of whether the path of least resistance is a move higher or a move lower.

The good news is that since we are still reasonable high in the middle of the 5000 range we have the potential to have a down day or two or three followed by a renewed upswing, which will have the effect of finally establishing some technical support here in the 5000 range which has been sorely needed for quite some time.

A sustainable advance deep into the 5100 range and beyond awaits palpable fresh money flowing into mutual funds, but the recent trend has been outflows instead. Maybe this will be the week that that changes, or not. There is usually no clear rhyme or reason for how people decide to add or take money from mutual funds - these are primarily ignorant retail investors who have a completely different mindset than professional investors, speculators and traders. The good news is that hedge funds are under a lot of pressure to deliver returns, and trading of volatility is one of the few reliable games left working for them these days, so volatile swings up and down within a wide but relative narrow trading range works for them.

NASDAQ futures are down moderately, indicating a moderate pullback at the open, but as always we must caution that futures and the opening move are not reliable indicators of the market trend for the rest of the day.

The more weakness there is at the open, the higher the chance that this will be a buyable dip with recovery through the rest of the day. But if the dip is too modest and the dip-buying is also too modest, the recovery will likely falter and lead to further selling as the day progresses. But if that cumulative selling is strong enough we could see another recovery bounce later in the day. But if enough hedge funds decide to switch to a more negative, risk-off bias, even modest initial selling could snowball and lead to another big sell-off taking us back below 5000. And each of these scenarios may have equal probability.

In any case, NASDAQ is sitting poised at a crossroads, again, unsure whether to break out for a new high, hover and build support above 5000, or revert to the rope-a-dope range trading of recent months.

-- Jack Krupansky

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