Securities Research Services

Wednesday, February 28, 2007

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


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.

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