Reality and Chaos
The "irrational exuberance" of the market over the past two years is now manifesting itself as bad dream, a junkie overdosed crash. It's time to come back to reality. We all knew it that it was getting carried away to the upside and now we have no doubt. People are looking at it now and saying "what were we thinking?" Reality is that things are not going to be the same for a long time, people that get burned bad in the markets and hurt financially take a long time to regain confidence. The US economy has been fueled by excessive consumer spending and unsustainable debt levels that all have to be washed out completely at this point to build a new base of investment, this time with a more cautious perspective. This is going to take a long time, longer than most people expect I think.
Fortunately we have been in cash for some time now, and other than being short, it has proven to be the right thing to do.
We are all tempted, seeing prices fall so dramatically to "buy the dip" as has been the right thing to do throughout this bull market. But as we saw last week, things are different this time, the early dip buyers are getting hurt. Have no doubt that this time it is different, this is a correction in the long term charts for a runaway market fueled by the Fed's liberal money policies, started by the Asian crisis of 98 and continued in advance of Y2K to ensure that we never ran out of free money; to spend heavily and avoid a recession. It worked temporarily. Of course the brokerages have taken advantage of the market euphoria and through daily their incessant hyping, have no duped the public out of a large percentage of their money through worthless IPOs and the "new metrics" for stock valuations where 20x sales is "cheap", and if stock XYZ is priced at 2000x next years earnings then 1500x earnings must be a bargain for stock ABC.
My best guess at this point is that what we are seeing in the markets is a massive correction of the move from the Oct98 lows to the recent highs in the tech stocks. Friday the Naz touched on a 50% retracement of that move. I do not expect that Friday's lows will hold this week. We could see some bouncing even Monday morning but bottom line is it is too early to do anything. Watching for a bottom to be put in is still the best way to play the market long term. Elliot wave theory supports the hypotheses that we have not seen the intermediate low on the Naz because wave 3 (we are in now) magnitude must be greater than wave 1 (we saw that two weeks ago), and we aren't there yet.
Short term there will be a countertrend rally that will be swift and short lived which could provide for some quick gains on the long side but only if you are able to see it, and move fast. The risk is of course that if you pick the wrong rally attempt it can be very short lived and you find yourself down within a few minutes or hours. I think for the majority the best thing to do is nothing, watch and wait, there is plenty of time to make money if and when the market turns (higher lows, higher highs). At the earliest a sustained rally will take several weeks to develop and I don't think anything is going to get away to the upside. For nimble traders that are able to tolerate a high level of risk here is my game plan for next week, hoping to make some money on the long side.
1. I am looking for the Naz to go sub 3000. From 2800 - 2900 would represent a 62% retracement of the Oct98 low to recent highs in the index. It would also be a test of the 1999 break out level, so it seems as logical a place as any to expect a bounce. If and only if this happens will I try to enter anything for a bounce play. Otherwise I will sit out and continue to watch. I will not play any bounce play if the Naz does go below 2800, or if the DOW goes below 9731, or if the SP500 goes below 1245). Forget it.
2. I will not take any big positions, but rather « postions at most in some of the big cap tech stocks that are heavily traded. I don't want to mess around with any small caps at this time.
3. Providing that the Naz does go sub 3000, the easiest trade to play the Naz for a rebound is to buy QQQ depository receipts, or XLK (Naz 100 depository receipts)
4. I would look for entries on the QQQ around 70, and on XLK around 43
5. There are a few stocks I would consider as well as long as they have not broken below the following levels:
SUNW 58.2
ORCL 51
CSCO 46
INTC 90
TXN 111
AMGN 45.5
ADBE 76.4
MERQ 54
JDSU 70
SDLI 93.5
RFMD 72.5
CREE 81
DISH 32.4
QCOM 94.8
CPN 65.9
FLEX 41.6
This means if any of the above stocks hold above these levels from now to the time that Naz goes sub 3000 they are still a potential candidate for bounce play. If they have gone below this level I wont touch them.
Also if any major brokerages come out an recommend these stocks during this time I wont touch them.
The above break points are what I consider significant fibonacci retracements that I want these stocks to hold here otherwise I expect them to go much lower.
6. If the Naz goes sub 3000 in the first hour of trading on any day next week, I will not execute any trades above, but rather wait for a retest. In fact waiting for a retest should be a good idea no matter what time of day it happens ( providing it does).
7. If I do enter any of the above trades I will have a tight stop (mental stop) of like 5% from my entry. I am looking for at most a two day rally to around 3600 - 3800 on the Nazdaq which will be a 4 wave countertrend rally (elliot wave) at which time I expect things to turn down again. At a minimum I expect a retest of next weeks lows, but in reality I don't expect them to hold. I think long term the Naz is going lower. The fibonacci/ elliot wave targets I get based on last couple weeks action is 1354 on the index. Or back to 1998 lows in the future.
8. I will be looking at the DOW and SP as well next week. If they are tanking bad (DOW below 9731 or SP below 1245) forget it , not playing anything because the overall market is just too weak.
If we don't get a good test of sub3000 on the Nazdaq then I'm going to just wait it out. Maybe for several weeks and watch some more. Again I repeat no big positions, small trades is all I'm after, not trying to be a hero here, yet <g>.
Good luck
Mike |
