<font color=blue>2001MAR19 Market Analysis and Commentary
The market is truly diabolical.
Last week, we wrote about the pending test of top in the June 30-year Treasury bond futures contract:
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Bonds had been moving up in an orderly fashion, on “flight to quality” as the market cratered. Of course, tomorrow is the fabled meeting of the Federal Open Market Committee where we expect rate cuts to be announced. It seems like a done deal, and the only question is of how much. Or is it really that simple?
There have been numerous commentaries written of late, mostly ones that lay the blame squarely on the shoulders of FOMC Chairman Greenspan for the sorry state of the market. Of course, when it was going up, Greenspan was on the cover of Fortune magazine, under a caption “In Greenspan We Trust”:
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What a fall from grace, but was it really his fault? And does the Fed really lead the market? I think the answer is “no”. We can make the chicken and egg arguments until the end of time, but the truth is that the currency and the bond markets are probably even bigger than the Fed, and market forces ultimately dictate interest rates, and probably everything else in the capital markets. Short-term, there are opportunities for some suasion, moral or otherwise, but in the long-term, as it is often said, the Fed is always behind the curve, catching up to what the market has already done. This is what makes this pending rate cut so interesting. This was one amazing setup, as we thought it would be when we wrote last week.
We go into the FOMC with bonds having failed on a test of the recent high:
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Not only is it a test of top, a test of contract high, it is also a little fake poke above the top of a rising wedge – trapping breakout players, those betting on lower interest rates, seeking relief from the evils of the stock market. Upon the new high, the Tbond failed and has now achieved a move to the first immediate target to the downside, the lower boundary of the wedge. What happens next in terms of price action will be very important. Whatever the announcement from the FOMC, the price and volume of the bond market is more important. Should the bonds fall out of the wedge tomorrow to the downside, this will confirm a short-term failure on test of these highs, with the next target below at 105.292, the 20-day EMA. This will put upward pressure on interest rates, all the while that Greenspan and Company are attempt to lower them. This should be fun.
We contrast this with the stock market, particularly the NASDAQ. For months, the only question being asked by anyone was “is this the bottom?” Justin Mamis, the technician’s technician, used to have a great answer for this: “Not if you’re still asking…” The financial media has been looking for “capitulation selling” for weeks, and with everyone searching for this with a high-powered microscope, would the market really deliver on demand? Never. And so the selling just went on and on, until investors were afraid to look at the screen anymore…
Finally, this weekend, after a weeklong Armageddon that saw many stocks further annihilated to multi-year lows, came all kinds of anecdotal reports from the field of something really interesting. There was evidence all around that the classic repulsion phase had magically kicked in, when Every Man basically gives up on the market. It was the part where they all swear "I'll never do it again", where they see no risk of missing out on profits by selling now. We took that to mean that a bottom was here in the making, especially after reading a lot of projections to ever-lower numbers on the downside for the NASDAQ:
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This evidence was telling us that most believed that there was zero upside potential, and it is precisely times like this that the market will often surprise, no different that how the market first began it’s descent last year, on a textbook failure on a test of top. At that time Every Man perceived only the risk was that of missing out of profits by not being long. No consideration was paid to downside. Sadly we noted this and wrote about it on May 4, 2000:
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Of course we still needed price action to confirm. That wasn’t too hard to find. We update almost 200 stock charts by hand these days on a daily basis, and in the NASDAQ, we have been seeing tests of major lows over the past week or so, many of them forming the fabled Trader Vic 2”B” test of bottom on the daily chart. Here we show you a chart of the popular QQQ, the NASDAQ 100 Index Tracking Stock:
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We reviewed this chart in the TopTick SquawkBox Trader’s Club this morning, with a view to formulate a buy strategy for those who were interested in taking the swing trade to catch a move up, should a bottom be in the making. When we say bottom, we say “a” bottom, rather than “the” bottom, as we have no psychic powers with which to predict the future. Suffice to say that this downtrend has had five downswings, two more than normal and this told us that the probabilities of additional swings down were smaller than the probability of a 2B test of bottom being successful. We measured carefully the risk reward ratio, and came to set up a buy stop on break of last Friday’s high of $42.50 with a stop at the day’s low, which was $40.75. The alternate strategy was to buy April 40 calls on the QQQ upon the break of $42.50 to the upside, with a view to stop out, should the QQQ fail to hold this test and trade back to $40.
As with any 2B test of bottom, we can calculate targets. The immediate target to the upside was the previous swing high, that of March 15 at $45.95. IF this target is met, and buyers overcome sellers at resistance at the top of this tall black candlestick, THEN the next target to the upside would be at $47.33, the 20-day EMA overhead. After that, we would have to see if sellers come back again to sell the bounce.
This produces a curious market factoid. We have a potential reversal here in the equity market. How long and how high it can go, we don’t know. We only know that the 2”B” has been put in. We now need to see a thrust up to show us that the sellers are done. At the same time, we have a 2”B” test of top failure on the Tbond futures. Which one will dominate the market? We shall see tomorrow at 2:15PM, when the catalyst comes to move the market one way or the other. One thing is for certain. If the market is “saved”, then all those who “flew to quality” are going to learn that sometimes, it is good to just sit on something that doesn’t fluctuate much, such as cash. T-Bills, to be exact. |
