NASDAQ struggling to decide whether to break out

That certainly was a decent rally for NASDAQ on Thursday, meeting my stated target of a 60-point gain to put in a respectable showing. This indicates that NASDAQ is still in the game, but a single win does not tell us that we are out of the woods, the trading range, yet. NASDAQ is still short of a new high, with four closes above the close of Thursday. NASDAQ is also desperately short of having decent technical support above the magical psychological 5000 level. Sure, range trading by hedge funds virtually guarantees that we can rally from below 5000 to above 5000 almost on a weekly basis, the serious lack of fresh inflows of cash to domestic stock mutual funds are preventing a sustainable advance above where we are right now.

The latest weekly report from the Investment Company Institute on Wednesday showed that domestic stock mutual funds are stilling hemorrhaging cash in a serious manner, although the loss for the most recent week was less than a third of the prior week. Whether retail investors may simply be abandoning mutual funds in favor of ETF's, robo-advisers, and other more modern forms of investing in stocks is unknown at this stage. In any case,on any give day or week the hedge funds appear to remain in charge of short-term market moves, which this year amounts to up and down swings within a wide trading range, currently roughly 4850 to 5100.

NASDAQ futures are up moderately, indicating a moderate pop 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. A moderate rally after a decent showing yesterday doesn't feel out of character. Alternatively, selling into the rally and taking profits would also seem to be par for the market these days as well. It is up to the hedge funds to make the call.

It is a Friday again, so some fraction of short-term speculators will tend to close out positions in advance of the weekend when anything can happen. If they are net short that could mean more buying to cover short positions, but if they are net long that could mean some selling. But even if shorts are covered, that only adds to the risk of intensified short-selling next week.

Today is the midpoint of the month, so its almost past time for the infamous "sell in May and go away" calendar trading pattern to kick in. Sure, it could still make an appearance, but it is almost starting to look like a no-show this year. No matter how predictable trading patterns are, they are never guaranteed. Regardless, the dramatic market volatility is enough to scare away many investors anyway even if the net monthly trend does happen to be positive.

We could indeed have a little follow-on rallying, like maybe a 15 to 40-point gain for NASDAQ today, but such a moderate rally would probably be a negative sign that the recent advance is running out of steam. I wouldn't put any faith in a Friday market move in any case. The big question is whether the advance of this week may leave NASDAQ poised to be vulnerable to a bearish attack by hedge funds seeking to play the next downswing in the trading range.

One scenario is that we have a couple of nice but only moderate rallies today and Monday and maybe even Tuesday, maybe even closing above 5100 for the first time, but then the advance would effectively be over and the hedge funds would then quickly switch their trading bias to risk-off and trade NASDAQ back down in the trading range into the 4900 range again. That is not a slam dunk, but a reasonable possibility. After that? Rinse and repeat, with yet another rally to reclaim the 5000 level within another week or so.

To me, the main test is whether NASDAQ can establish support in the 5000 range or maybe even the 5100 range. I personally define support as a strong up day followed by a moderate down day and then an up day, preferably with more than one of these down days as long as the bulk of that sharp advance is preserved. The resulting valley gives technical traders a clear marker on their charts. It has no economic or business fundamental value whatsoever, but neither do all of these crazy swings in a trading range.

The main target I personally am looking for is for NASDAQ to close above 5150, to establish support in the 5150 range, and to then move on to the 5250 range. Until then, NASDAQ will be quite vulnerable and prone to range trading that takes us back to the 4900 range. But for this to happen, we need to see some consecutive weeks of inflows of fresh cash into domestic stock mutual funds, which we have not seen in the past six wees.

Meanwhile, I'll continue to trade big dips of quality stocks, with a target of 5% gains on the inevitable recovery bounces. My retirement accounts remain on autopilot, fully invested in quality growth stocks.

There are several interesting tech IPO's coming up in the next week or so. My usual IPO strategy is to buy a modest amount on the open, sell half on a 10% gain, and then play the dips. On rare occasion I may get an allocation of the IPO itself from Fidelity, in which case I'll hold it indefinitely.

-- Jack Krupansky