NASDAQ poised for more needed consolidation, but...

With NASDAQ poised near its peak, and the economic and quarterly reports barely so-so, NASDAQ desperately needs more than a little consolidation at these levels before it can sustain much more of an advance at this time. It has very little in the way of technical support in the 5000 range or the 5050 range. That is not to say that NASDAQ can't or won't push to new highs very quickly, but it is to warn that without better technical support any spurt upwards could just as quickly reverse and turn into a mini correction or worse.

Q2 is not shaping up as firmly as people had expected or hoped. That doesn't mean the market is doomed to fall back, but it does mean that anything more than a modest advance over time would be very prone to dramatic corrective action. And any advance is that much harder and that much less sustainable without significant inflows into domestic stock mutual funds - which have been experiencing dramatic outflows over the past two months.

Today could be slower and choppier than usual as it may take a day or two for the big dogs to get back to their desks after the long holiday weekend, especially when the market is looking more than a bit uncertain and with no clear catalysts to the upside.

The good news is that as appealing as an overvalued market may be to short-sellers, they will be more inclined to stick with tight stops, which means that even the slightest rumors of a rally can kick off another short squeeze and push the market even higher.

In short we have a volatile market where the lack of strong upwards momentum is about equally matched by a distinct lack of conviction by the short-sellers. That doesn't mean that individual short-sellers don't have very intense conviction, but simply that net-net they are not the clearly dominant force in the market.

So, here we are near the upper edge of the wide trading range, with no clear catalyst for advance but also no clear catalyst for a solid reversal. Flip a coin whether or when the hedge funds decide to reverse their trading bias and force the market to trade back down in the wide trading range at least for a few days.

Lingering uncertainty about the infamous "sell in May and go away" calendar trading pattern confuses the market even more. To some it is clear that the pattern is not holding this year, while others believe passionately that the pattern is just getting started and the the summer months will be brutal. Again, flip a coin as to which side will marshal the stronger market activity over the next couple of months.

Even if Q2 does shape up to be another lousy or lackluster quarter, there will still be plenty of longer-term speculators looking out to Q3 and beyond for guidance on how to place their bets. A lot of the factors that dominated in Q1 and Q2 will tend to be muted in Q3 and Q4. Yes, the Fed will be a factor later in the year, but not so clearly a major factor since interest rates will remain quite low even a year from now.

Once again, the only certainty here is volatility.

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

One strong possibility is that we see a little weakness at the open, but unless a strong sell-off quickly materializes, people will opt to buy the dip and instigate a modest rally as short-sellers are forced to cover their short positions. The problem with that scenario is that that rally itself would quickly run out of steam and lead to another reversal, rinse and repeat. The open question is the extent to which hedge funds will shift their net trading bias either more to the positive to bounce off the shorts, or more to the negative to eat into weak long positions. On top of that, hedge funds are really under pressure to perform, so they could be prone to shifting their trading bias more quickly to match a volatile market. As I said, the only certainty is volatility.

In short, we have equal probabilities for a modest pullback, a big sell-off, or a modest advance, with a slight chance of a big rally. About the only catalyst for a big rally is the obvious fact that no big sell-off has materialized despite the shakiness of the recent advance.

-- Jack Krupansky