Once Again an Asian Crash Rocks the World Markets

Some have been bearish on this market since last July when the bull market rally began. We have been embracing the bull since last August and have profited from it handsomely. Meanwhile, those who refused to accept the fact that the market was going up continued to call a top at each rally and their followers subsequently were forced to keep covering their short positions at higher prices as the market moved yet even higher.

Yesterday the pessimists had their day in the sun as the plug was pulled on Chinese speculators plunging their market an incredible 10% and rocking markets across the globe. Yesterday's crash reminds us of the Asian crisis wrought on by the Japanese central bank last April that also sent stocks tumbling. But the truth is, it was much worse. Yesterday was pure seller panic much like September 11, 2001 or the October 1987 crash.

The reality of today is that we have a global economy and when an emerging market like China crashes, it has an impact on the rest of us. And when that happens, you can just pretty much throw all analysis out the window. Yesterday an incredible 99% of all stocks in the US market were down. It hurt and we stopped out of several positions and gave back profit on others. The good news is because prior to this crash we had been embracing the bull, we had a very nice percentage gain on the year. We gave back part of that profit yesterday. However, it could have been worse. We could be trading index funds and be upside down on the year like so many others.

What next? Is this a buying opportunity or a shot across the bow warning of further selling to come? And that's the $50,000,000 question.

We suspect a buying opportunity will emerge out of this when the dust settles. Today, though, we highly recommend just getting out of the way of this stampede because selling may not yet be over.

Let's look at the long term QQQQ chart (weekly view).

Note the similarities between yesterday's sell off and the sell off that occurred after last spring's Asian crisis. Following that sell off, only the aggressive shorts profited and everyone else was left to the sidelines waiting for a tradable bounce. We will label this Exhibit A.

Exhibit A

Drilling down to the daily view, note that last April after an initial crash day like the one experienced yesterday, selling continued over the next few days.

Exhibit B

Now, take a look at the 2003 bull market. Over the course of that run the market had two similar "crash" weeks which were used as buying opportunities.

Exhibit C

The chart above represents a weekly view. Now, drill down to a daily view and you can see that support was quickly found and prices firmed before they once again rallied.

Exhibit D

Summary:

Our course is clear then. Today we wait. If more selling ensues and volume remains high while breadth is poor, such as it was in Exhibit B, we take on one or two aggressive short positions later this week. After that, we look for a bounce and short the bounce aggressively. On the other hand, if prices firm up, like they did in Exhibit D, and we start to see nice trade set ups emerge on the long side, we will ease our way back into this market on the long side in expectation of a resumption of the uptrend.

Once again, today it is wise to wait. Only the very aggressive and the gamblers will be testing the waters today. Stay out of the water until the sharks have had their fill.

Turnaround Tuesday?

Permabears should be thrilled to know that the SPY (S&P 500 ETF) has now surpassed its high water mark carved out at the market peak in 2000. All this talk of a bear market bounce and the inane shorting each time the market makes a new high just goes to show how deluded this group of economic pessimists is. Eventually they will get it right, but by then they will likely be out of money and won't be in the position to take advantage. Either that, or they will have been won over to the bullish side right before the market starts to run back down the hill.

In any case, the market players have once again grown overly bearish after yet another weak Monday. This sets us up very nicely for another possible turnaround Tuesday.

Prices a Bit Sluggish

The focus continued to be on the semiconductor sector on Friday as the broader market endured a second day of sluggish action. The SMH did indeed break above the neckline of an inverted head and shoulders pattern, which is theoretically bullish. However, until we see it close firmly above $36, where we believe the real resistance is, we hesitate to get too excited about this sector or tech in general.

Scans over the weekend did not provide us with anything particularly compelling. There were some decent set ups, but decent is not good enough in a market that is going through a sluggish phase. In our opinion, it's better not to push it here, but to wait for something to develop out of this period where buyers seem to be taking a rest.

Strong Move Continues to Brew

Commentators are excited about the strong move in the semiconductors yesterday. Until the SMH can break out above its weekly resistance (where it closed yesterday), we hesitate to get too excited about tech stocks. Oil is breaking higher once again though (big surprise – not!) and stocks in the broader market are toying with their highs in what could lead to a strong break higher fueled by yet more short covering.

Impass

Scans today didn't turn up a lot of areas of strength, but this is likely due to the fact that the market is at an important decision point. If stocks turn lower here, we could see a quick steep sell off back to support. If they break higher, prices should firm up nicely.

Don't Let Fear Keep You On the Sideline

Our expectations for a minor market decline this week appear to have been off base. Buyers showed up and snatched up early weakness yesterday pushing the broader market to fresh highs into the close.

The market is extended here, but good trades often appear in these extended conditions. We have been making money for months now while the talking heads on TV have been warning caution.

Let your stops carry you out of the bull market, not your fear.

Be a Bull, but be Careful

The QQQQ is back at the top of its range. It could theoretically power higher here, but we think the probabilities for a pullback to the bottom of the trading range are higher. The long term trend remains up and we continue to find many good long set ups.

All of this said, we are frankly a bit nervous here. Perhaps that's normal after making good gains on many positions recently. When we look at stocks on the daily charts, we are not seeing any warnings or signs of distribution, but prices are extended when measured against their standard deviation.

One of two things needs to take place when this happens then: Either prices will revert to their mean, or, a large breakout will occur, which will redefine the range of standard deviation. Since the trend is still up, we will cautiously lean toward the latter, but we need to be prepared to switch allegiances should prices decide to regress back to the mean here. In other words, be a bull here, but don't be afraid to turn bearish if necessary.

Probably a Quiet Day Ahead

Today is options expiration and the market is closed on Monday for a holiday so we don't expect much activity in the market today. At a minimum, today is not an optimal day to open new positions. Maintain current positions and enjoy the long weekend. We will evaluate the weekly close on Tuesday.

Bulls Remain in Charge of the Tape

Trading range watch continues. The QQQQ closed at the upper end of its range yesterday. With options expiration tomorrow, we doubt that it will make much more progress here, and expect that it will chop back toward its $44.00 max pain level.

Even so, the market is in great shape for a fresh leg higher. Look for the S&P and Dow to consolidate near current highs and look for the QQQQ to attempt a break out above $45 over the next week or so.

It remains to be seen whether or not a break out will succeed, but so far the probabilities remain in favor of the bull camp.

Nervous Market Needs More Back and Fill

Bernanke testifies before Congress over the next two days and traders are nervous. It is likely that he will provide market moving information as the Fed appears to have hit the sweet spot with their last round of hikes, keeping inflation in check and keeping the economy on solid ground. Even so, the market may be a bit jumpy as it digests the news. Happy Valentine's!

Back at Support

The QQQQ returned to the lower support area in its trading range on Monday. The market has turned very bearish as it considers this meaningless move back down to support. This bearish posture and the fact that the market is at support, projects a move higher as we approach expiration on Friday.

Nevertheless, this trading range activity is essentially meaningless and the price of the QQQQ is likely to fluctuate around $44.00 the rest of the week.

Use dips to accumulate here and don't chase breakouts.

Trading Range, Trading Range, Trading Range...

On Friday stocks bounced off overhead resistance in the trading range. This can be seen clearly by looking at the QQQQ (NASDAQ 100) chart. For three months the QQQQ has bounced between $43.50-$44.70. On Friday the QQQQ briefly tagged $44.72 and then turned south, as should have been expected by anyone who recognizes that this market is range bound.

Note, however, that the QQQQ is approaching its uptrend support, representing the trend which began back in July. Options expire on Friday and it is very likely that the QQQQ will remain range bound until then, allowing options sellers to cash in with full profits as their contracts expire at or near $44.00 maximum pain. Friday is also the day that the QQQQ price should run into the uptrend.



This week, then, is likely to remain fairly uneventful and moves within the trading range should be interpreted only as market noise and nothing more. When the QQQQ runs into the trend, we will then know whether this market is going higher or creating a top. Probabilities favor a move higher, but don't discount the fact that the uptrend might fail to. In other words, plan for the best, but be prepared for the worst so as not to be disappointed if the market doesn't fit nicely into your expectations.

Gold Catches Fire

The broad market continues to work its way slightly higher and tech continues to work out its trading range. We suspect that a sharp one or two day drop may be coming up that will shake out the weak hands and put fear back into the retail traders who are starting to recognize the uptrend.

After options expiration is out of the way, look for tech to start trending higher as it scales a wall of worry.

Meanwhile, everything's golden in gold. Gold is catching a bid and the upcoming move could be a big one.

Broad Market Makes New Highs

The public continues to refuse to recognize that the market is in a strong uptrend. Ever since this trend started in late July the public has been trying to guess at a top and each time the market powers higher they are forced to cover their shorts at higher prices and as such adding more fuel to the bullish fire.

Bears have continued to furiously purchase put options even as the broad market made a new high yesterday. Scans show an underlying degree of buying that could power this market higher for some time to come.

The trend is up and dips are buying opportunities until the trend changes. We certainly would at the very least avoid the temptation to try and call a top in this strong market.

All of that said, don't lose sight of the fact that the market always has surprises up her sleeve. Bet on the upside, but make sure to honor your stops in case something goes wrong.

Time Correction

One word only be used to describe yesterday's session: flat. That word packs a punch though if you consider the fact that the broad market has continued to drift higher over the past few weeks and the tech sector has been correcting sideways.

There are two ways that a market can correct after making gains. It can pull back on profit taking, which is a price correction, or it can trade sideways, which is a time correction. Time corrections are always more bullish than price corrections since they represent the fact that sellers have virtually no power to move the market. The most explosive moves generally follow time corrections.

Add to this the fact that the ne'er do well options traders are once again betting heavily that the market has topped out by furiously buying put options, and you have an explosive situation.

Now put buyers may get a tiny bit of encouragement if the market dips again like it did on January 25 and 26, but such a dip would only be a tease that would make them think they were right, when in reality it would represent only a move back down to major support levels. Unless you are trading for scalping profits, there just doesn't seem to be much profit on the downside in this market; not right now anyway.

Tech May Surprise Shorts

Put buying in the tech sector has been steady over the past week. Likewise, money flow into the tech sector has been occurring even as prices in this sector have been lagging the broader market.

This reveals a situation where dumb money has been selling tech short under the assumption that the lag in this sector is somehow meaningful. At the same time, it shows that smart money has been accumulating the weakness.

The week may get off to a weak start as overbought conditions in some of the stronger areas of the market work out the profit takers. The market remains in an uptrend here though and we expect that dip buyers will continue to step up to the plate. A breakout in the tech sector could spark a strong rally as current shorts are forced to cover.

Keep in mind that the QQQQ is still about a week away from touching down at its long term up trend line. Meaningless games are sure to be played as the market continues its sideways consolidation.

Tech Holds Back Market

The employment report could set off some volatility today, so it's best to take a wait-and-see attitude to the market today as you manage your industrial sector positions. Tech has been like an anchor around the neck of the broad market over the past week and yesterday it once again held back any significant buying.

Industrials all the Way

Yesterday's rally off the Fed minutes release was nice, but it is not a signal to chase the market. Fed rallies usually reverse the next day. Likewise, the market is still in a consolidation range and it will be another week before the QQQQ runs into its long term uptrend. It would be healthier if the market would continue to trade sideways here, so we hope that an unsustainable rally higher from yesterday's gains does not follow.
br> Meanwhile, the industrials have established an excellent base of institutional volume support. We haven't read about this quiet accumulation anywhere so there is a great chance that we are getting in on the ground floor of what is turning out to be a very nice sector move.