The Oracle of Redwood Shores
Oracle (ORCL) founder and CEO, Larry Ellison, tried single-handedly to stop the bleeding markets on "not as awful as expected" earnings news last night. After a sharp rise in all broad indexes the first hour of trading this morning, the effort failed. It looks like a classic failed rally as bearish sentiment remains intact.
So the world will continue to fall apart for those long, and bears will make a mint in the process? Not so fast. While The NASDAQ had shown seven previous declining days in a row, and while today's 4-point gain is a hollow victory that effectively makes this day 8 of the NASDAQ hostage crisis (hostage to bears), this prolonged selloff will soon be made a museum piece based on its rarity.
Any doubters? I hark back to an example I heard in the most recent live seminar in Denver. If 100 people flip a coin at the same time, roughly 50% will get heads, 50% will get tails. Only those flipping heads are allowed to flip again. Probability says that only one person will be left after 6-7 rounds of coin-flipping. The odds of that person continuing to flip heads an eighth or ninth time is highly unlikely. We can safely bet that tails will soon arrive ending that improbable streak. So too is the case with the NASDAQ despite how bleak things now seem for all that is technology, excepting maybe the software index.
The point is that while ORCL succeeded initially in supporting the tech heavy NASDAQ, it alone could not float the whole market, and only software was left with nice gains. Bears would say it only proves they are firmly in control with sentiment still negative going forward. While that may be true at this moment, personally, I am dubious for the statistical reason noted above and would suggest the possibility of an upside reversal is closer than we think.
Weak fundamentals support the bears' position until companies stop warning of worse than anticipated results. But the oversold oscillators that currently reflect investors' belief that things can only get worse suggest too many natives are turned in the direction of the jungle noise of the perceived danger. The real danger is what is what lies back over their shoulders that they have yet to perceive, let alone face.
The prudent native should now be on guard facing the opposite direction. It is that lone contrarian native that will lead the tribe to do an about-face. I am not suggesting that we be pioneers and take bullish positions on everything in sight, but that we open our eyes to the possibility of some renewed bullish action, especially going into the FOMC meeting one week from today, the end result of which should be another rate cut.
That said, nothing else much matters, save earnings. So we can skip the housing starts and building permits data released this morning (slightly more activity than expected), and the leading indicators figures to be released tomorrow morning at 10 am ET.
Now, about those charts. . .
NASDAQ 100 (NDX) chart:
Fill the gap. Fill the gap. Seems like that is all we have heard for some time now. Guess what? Gap filled over the last four days! What we see now is support at about 1650. Keep in mind, the NDX represents the top 100 market cap stocks on the NASDAQ so the leaders' bullish repair work appears mostly done. While 2000 may provide a psychological resistance to the COMPX, the oversold oscillators on the daily chart, the candles' touch of the lower Bollinger band, filled gap, and 1650 support tell us that there is more risk in being short going forward. Yes, there is some room to fall on the 60/30 min charts (not shown), but that could lead the NAZ to reversal from oversold in a few short hours as those oscillators are nearly oversold already. This is not a suggestion to back up the truck or call the bottom of the trend. We will wait for confirmation as outlined in the gameplan before going long. Just realize it could happen any day now, including tomorrow.
Dow Industrial (INDU) daily chart:
As for the Dow, scouts honor, I have not redrawn the retracement brackets in two months! The ghost of Fibonacci lives! Anyway, 10,550-10,600 makes for pretty good support wouldn't you say? Should that fail, 10,450 is the next bracket down.
We can already see from the charts that the daily oscillators are oversold and perhaps turning the corner, while the 60/30 shown circled above shows perhaps a bit more damage to be done. Again though, the downside appears limited given the candle position of at lower Bollinger bands, historical support, and oversold (or nearly oversold) oscillators. A break and close back over 10,700 would be our cue for conservative traders to get long again. Watch for turning oscillators.
S&P 500 (SPX) chart:
The SPX is in a similar situation. Notice the daily chart with candles finding good support just over 1200 and touching the lower Bollinger band. Meanwhile the daily stochastic has fallen into oversold with the fast line turning up suggesting that a bullish phase may not be far off. The 60/30 oscillators show the possibility of a few more bearish points to fall, however 1207 has held up well. Again, negativity is focused on earnings and nearly every native in the jungle is facing that prospect - too many natives facing the same direction. Bullishness is likely not as far off as many think.
As for the VIX, despite the drumbeat of the bears, it has been falling for the last three days. Given the bearish tone of the market for the last week, it is surprising that the VIX shows bulls have been silently aggressive.
Has that been in anticipation of another rate cut? Perhaps. And though a rate cut will have no immediate impact on the economy and corporate profits, the psychological impact is unmistakable. "Don't fight the Fed" will back on the lips of most who parade on the visual business news channels. The VIX may already be reflecting renewed (though probably misplaced in the next 6 months) bullish sentiment in coming days or weeks.
All that said, please do not mistake these words as a bullish call to arms. I am merely suggesting that relief and a new bullish move, though not likely sustainable for more than a few days or weeks at best, is a lot closer than we think, and that we ought to be thinking of that as a high probability event (no, process) in the near future. In the meantime, the bears still rule the Street. But as hockey great, Wayne Gretzky, states, his success is based on where the puck is going, not where the puck is. All indicators suggest the puck is ready to go in the other direction. Prepare to skate there and wait for the goal-scoring opportunity.
Or as in the example of the jungle native, look over your shoulder to see what the other natives are missing as they focus on the loud noise in the trees ahead of them.
See you at the bell!