BigTrends.com
Weekly Market Outlook
October 11, 2003
NASDAQ COMMENTARY
We were looking for final answers with Friday's action, but really didn't get any.
Making a higher low but a lower high simply means that today was less volatile than
Thursday. We were hoping to see a higher or lower trading range to tip is off about
what investors were thinking, but it wasn't meant to be. The Nasdaq topped out
Thursday at an eighteen month high of 1936.93, but failed to approach those levels
again on Friday. In fact Friday was the only day last week that we didn't make a
higher high, so don't let one day fool you - the charts are saying we're still in an
uptrend.
The concern at this point for the Nasdaq is the chart gap between last Thursday's
high and last Friday's low. In general, no gap goes unfilled, so the consistency of
our bullish trek this week was a bit of a surprise. We would need to fall to under
1842.55 to close the gap, which is obviously not a fun thought for the bulls. From
the current readings around 1911, that would mean about a 3.7% drop.
But that kind of dip, or even a bigger one, is certainly possible. During the
March/October rally, we saw a pullback as big as 7.9%. If we did that again, that
would drag us back down to the 1760 level. But we'll worry about that at a later
time. For now, just note that stochastics indicates we're overbought and that a
pullback is likely. As always, don't jump the gun with stochastics. Our official
signal is the cross of the two stochastic lines back under the 80 line. This is an
indication that stocks were overbought and are starting to correct that condition.
We're even more interested in the falling Chaikin line and its implications. As a
quick reminder, the Chaikin line is a volume-weighted momentum line. It's importance
lies in the fact that it pairs price movement with the volume for that movement.
These big price moves on big volume are important to note, since it means that the
number of investors buying or selling in that direction is increasing (you absolutely
must have increasing volume in the direction of the trend if you want that trend to
be sustained). As you can see, the Chaikin line has been falling for a few days, and
is very near a cross under the zero line. This is simply an indication that there is
more and more selling volume in relation to buying volume. The official bearish
signal will come with that cross under zero.
Ideally, we'll get several of these sell signals simultaneously. But until we get any
of them, the trend is technically a bullish one. Read the 'Bottom Line' for our take
on that though.
NASDAQ CHART
S&P 500 COMMENTARY
There are two things to note about the S&P 500. The first is simply that the index
touched on its resistance line Thursday and pulled back from it on Friday. The second
is that the CBOE Volatility Index (VIX) is at an extreme low that often coincides
with at least a short-term top. We'll limit our focus this week to these two ideas.
Like the Nasdaq, the S&P 500 became stochastically overbought (not shown) this week,
so we knew that continuing higher would be tough to do. What was a little less
obvious was the precise reversal point. We had seen a couple weeks ago that 1040 was
a critical level, but it's now clear that the slightly rising resistance line would
contain the index at Thursday's high of 1048.26 (see chart). This is the third time
this resistance line has been touched but not passed. Friday's failure to even
approach that 1048 mark suggests a high likelihood of sinking back into the lower
side of the trading range.
We're also seeing some trouble ahead based on the low VIX reading. As a quick
reminder, the VIX is regarded as a 'fear gauge' (the lower the VIX, the less fearful
investors are, and the higher the VIX, the more fearful they are). The majority of
the time the VIX is basically neutral, but when it reaches extremes, we know that the
reversal nobody expects is just around the corner. That's why we're concerned that
the VIX is making new lows - the high degree of confidence is often a setup for a
major disappointment (i.e. a drop in equity values).
To determine what constitutes a relative 'extreme' in the VIX, we can apply Bollinger
Bands to the VIX chart (bottom portion of chart). As you can see, in early August and
late September the VIX poked above the upper band right about the same time the
market reversed higher. In other words, people were most pessimistic when they didn't
need to be. Likewise, in late July and mid-September, when the VIX brushed against
the lower Bollinger Band, stocks crossed under the 10 and 20 day EMAs for a
decent-sized loss. Currently, the VIX is not quite at the extreme low of the lower
Bollinger Band, but it's headed that direction. Combining the low VIX, the resistance
we hit but failed to cross, and being stochastically overbought, the bulls should at
least be a little concerned here.
S&P 500 CHART
BOTTOM LINE:
This is going to be one of those rare times where we're going to go against the grain
of the market. In other words, although stocks are still generally headed higher,
we're thinking that this may be the beginning of a pullback - at least in the
short-term. The gap in the Nasdaq chart from Friday is still unfilled. This is a very
rare condition that we expect will be corrected soon, which in turn could set off a
chain reaction of further negative events. The most meaningful of these events would
be a cross under the 10 day EMA line (and possibly the 20 day EMA).
And we hate to keep pounding the table about October's weakness, but it's not a myth
- October is more often than not a losing month for the Nasdaq. We're getting some
signs now that we may see a bottom this October too. Being overbought is one of those
signs. That's ok though, as it usually leads into a strong finish for the year. Don't
let a rough patch over the next several days keep you out of stocks when things start
to turn up again in November.
Have a great trading week ahead.
Price Headley, CFA, CMT, President
With James Brumley, Research Analyst
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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