Thursday, June 04, 2015

NASDAQ due for more consolidation

It is still more than a bit troubling that NASDAQ doesn't have a lot of technical support in the 5050 or even 5000 range, which adds risk to any attempt for a sustainable breakout above the 5100 level. This simultaneously dooms the market to more range trading, but also provides more opportunity to in fact establish technical support in theses ranges.

Has there been any significant change in economic or business fundamentals overnight to justify a sharp pullback today, with NASDAQ futures down fairly sharply? Nope. Not at all. This is another fake-out attempt to manipulate the market, a purely technical move. Sure, the fact that NASDAQ was not able to maintain its early gains yesterday and wasn't even able to close above the 5100 level, and the market has had numerous opportunities to do so in recent days, so the clear path of least resistance at this stage is a reversal and move downwards in the wide trading range.

This is actually really just a test, to see how much of the recent advance really does stick or is just short-term speculators willing to bail out on a hint of lack of momentum. The bad news is that tests are common and not so pleasant. The good news is that tests help to shake any froth out of the market and result in more solid technical support which is actually a good thing for creating a solid base for a sustainable advance.

It was very telling yesterday that NASDAQ closed only fractionally (75 cents!) above the opening level. It was a weak positive that the early gains held up, but weak is not very persuasive.

NASDAQ futures are down fairly sharply right now, indicating a fairly sharp pullback at the open, but as usual we must caution that futures and the opening move are frequently not reliable indicators of the trend for he rest of the day.

As usual, ultimately it is up to the hedge funds who continuously revise their trading bias, to decide whether they will add risk or take off risk. Let's see if the futures move this morning either reflects a change in bias by the hedge funds or not. Will they pile on and kick off a decent sell-off, like a decline of 70 or even 100 points, or will they watch to see how strong the selling is by weaker hands and actually engage in dip-buying which could lead to a sharp bounce from any intra-day low? We will see, for sure.

In any case, NASDAQ was due for some more consolidation anyway.

The latest weekly money flow report from the Investment Company Institute yesterday showed continued strong outflows of money from domestic stock mutual funds, but at roughly half the rate of the previous week. The data is actually a week old, so it doesn't technically reflect current money flows of recent days. This negative trend is a real concern, but unfortunately it is not so clear to what extent mutual funds drive the markets in these days of ETFs, hedge funds, and individual retail investors empowered with modern trading and investment tools, including Wealthfront and folio or social investing. In any case, a lack of fresh money inflows is a risk for the market, or at least it boosts volatility.

The 5100 level may be about to fade into the background, but maybe only for a few days or a few weeks. Or, maybe it will come roaring back within a day or two. That's the nature of the market we are in. Enjoy the volatility. Or not.

-- Jack Krupansky

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