Vicky,
Nasdaq market... two things will happen:
1. Rally From A Deeply Oversold Situation
Ken Mitchell, technical analyst at StockCharts.com view the current situation as "oversold" and expects a rally forthcoming. Stochastics and relative strength indicators are in oversold territory.
stockcharts.com
Rex Tagasugi, another technical analyst at StockCharts.com, also views the current situation as deeply oversold based on the McClellan oscillator, and expects a rally soon.
stockcharts.com
Neilson, in his candlestick book, views a situation as oversold and due for a rally if there are a series of successively down candlesticks, like the market now.
Todd Harrison (Realmoney.com ... by subscription only), head trader managing a real hedge fund, has been hedging for a rally for 3 days now !! (shows you, no one, even a successful professional trader, can pick bottom). He's still calling for a rally.
So, you're in good company with your QQQ call. I see my buying of QQQ on Friday as a call on the rally scenario. 20/20 hindsight could show that we had made a wrong call, but we're certainly did not do it dumbly.
Some traders may view that it's best to wait for a chart to show indications of an upturn before jumping in. The reality is that QQQ does not typically go into a nice predictable pattern to indicate that a rally will be happening. Instead, a rally tends to happen very quickly and suddenly. Before you know it, the stock is up 15% or more.
Also, rationalizing for a rally to happen before trading is just an indication that a trader does not want to trade in the first place for fear of losing money. After a rally, there is a psychological block to trade a stock that a day ago was so much cheaper. So next, there'd be more rationalization on not chasing a stock, or waiting for a pull back.
I wouldn't go short QQQ at this stage because it is deeply oversold. Another option is just to stay away, however, there is a cost here too... an opportunity lost. Why not take a long position in a deeply oversold situation since the probabiity is stacked toward a rally? So, in the final analysis, it depends on one's risk tolerance level, and trading style.
2. Falling Knife Falling Further
The Nasdaq 100 Index has already met it's down trendline. It is at a crucial point and if it continues to fall next week, then the market could be in an even longer bearish phase than market watchers originally expected. Interestingly, the Nasdaq composite index has not yet met the down trendline. We'll see if buyers come out next week in support of the trendline.
While we think there should be a rally soon from the oversold condition, the market could surprise us and go into a deeper bearish phase, breaking below the low (Nasdaq 2,200), and go even lower. If this happens, all bets are off, and I'd be extinguishing my positions.
From a fundamental perspective, things should be rosier, and not gloomier. Loosening of credit in the economy always helps the bullish case. Having Bush in the Whitehouse also helps the bullish case. Inflation is low, productivity is up (thanks to technology), and companies are much smarter and quicker in managing the bottom line (thanks to Internet and knowledgeable/watchful investors)... all helping the bullish case. However, earnings growth is problematic. With lower earnings growth, stock valuations fall. Falling valuations would create a new psychological investors' "acceptance level". When in the past investors may accept to own stocks with PE over 100 as long as earnings growth is in the 50% range, they may now only accept to own stocks with PE not greater than 50. If valuation acceptance levels change, then Nasdaq index would fall lower because there are still many stocks that have high multiples.
In any case, all we want is a rally next week for our bets to pay off. We'll see....
p.s. Glad you like the Trader Vic book. I find the approach very practical. Using the 123 concept, we can follow what Nasdaq composite is doing. It has completed step 1 when it broke up the downtrend line and reached a high of 2,892 on Jan 24. Now it is retracing (undergoing step2), and would be testing the low of 2,251 of Jan 3. So, 2,251 is a crucial number. If Nasdaq goes below this value in a convincing way, then we can say that the primary trend is again down... and who knows when or where a new bottom will be found. At Friday's close of 2,470, the fall from high is 422/641 = 66%. Wow... another pivotal point ..2/3 retracement. Next week will indeed be a telling week. Is it the end of the down swing, or the continuation of a downtrend. |
