Abbey Joseph Cohen, Ballmer, Greenspan, Acompora....Goldilocks and three bears.
Goldilocks got burned today by the negative market outlook announced by Ralph Acompora today. Ralph the mouth, seized another pivotal market day to try and make a bigger name for himself by announcing hi short term target for the Dow was now 8900-9200. ZAP! The struggling market never had a chance. Ralph said that market internals were breaking down at an alarming rate, a fact we discussed on Sunday, and even though he was bullish long term, his short term outlook was very bearish. The market went into a spin and broke under the 10100 level to 10081 before bargain hunters could stop the slide. Down -218 at 1:30 the recovery came on strong volume and pushed the Dow back into positive territory just before the close. A miraculous recovery in the eyes of some, considering the volume of economic events and a FOMC meeting in the next five days. The spark for the rebound was the expectation for the Bank of Japan to announce a new dollar/Yen program late this afternoon. Sorry! The BOJ announced late in the afternoon that they felt they were doing all that was necessary to inject liquidity into their economy and again called on the G7 to make a move. This may not play well tomorrow. You will recall that no one expected the BOJ to do anything but everyone else was hoping that after the G7 Japan would feel pressure to do something. Looks like it is not going to happen.
The downhill slide caused the Dow to again trade under it's 200 DMA but the rebound brought it back to a dead stop right on the line. (10275) The last three weeks has seen the Dow trade in a down trending channel which also tops out at 10300. Again, and I hate to seem like a broken record, but we are at a critical point. In order to break out of this trend the Dow needs to trade over 10400 and close over 10350 tomorrow. Failure to trade over 10400 or even hold over 10300 will doom us to several more days of bungee trading. A close under 10200 tomorrow would be very negative and could bring Ralph's prophecy to pass.
If you have graduated from Maalox to Dramamine and are seatbelted firmly into your trading chair then these big swings are perfect for producing trading rallies. Some of the chat rooms today were talking about the big bucks these moves produce. If you are following a specific stock, like QCOM, then you should be familiar with it's trading pattern. A gap down of -$8 at the open on no material news and then a steady rising intraday chart should set off entry point alarms. These -200 point drops cause recent winners to sell off strongly on profit taking but when the market starts rebounding they are sometimes the fastest gainers. QCOM closed positive after the -$8 at the open. If you are a holder and not a trader then don't try this at home.
Twice now the market has traded in the -10% correction range and twice it has rebounded. This is good. Today's rebound was much stronger than the Friday event. If traders are convinced that the -10% correction took all the excess out then we could move up from here. The futures are up strong at +3.00 but we have a lot of dark before morning. Remember the bear trap rally on Monday? The strong technical bounce at the open, slowly bleeding off all day as sellers continue to outweigh buyers. Tomorrow could be the same. The advance/decline line is still dropping like a rock with a three declines for every two advances today. The new highs/lows were still very negative with 40 new highs to over 100 new lows.
The earnings outlook is still good but we are only half way through the pre-warning season. After the close today Gillette and Safeco both announced earnings warnings. Neither appeared to have any impact on the futures so investors are still not too worried about random warnings. The Internet sector is still hot and may be holding up the Nasdaq. CMGI announced earnings that beat the street last night and said that next year earnings my grow by +300%. This powered CMGI into positive ground again today after a huge gain yesterday. YHOO, which announces next week, continues to show good strength gaining another +3.31 today. YHOO also dropped -$8 intraday and provided yet another entry point for target shooters. Remember, YHOO normally drops AFTER earnings, so don't plan on holding too long. The real Internet superstar continues to be AOL. Up +$28 since 9/21, AOL just refuses to pull back and let us in. We have a policy that we do not recommend stocks that have spiked the day before. AOL has fit that model for five days. Will they continue up? Probably so but the options have so much expectation built in that the premiums are very overvalued. Any future pullback by AOL would immediately subject the call buyer to sudden losses as the premium instantly evaporated. Playing stocks on a rocket run should only be done by very experienced traders. But you say, how can you lose money on a stock that keeps going up? Answer: Nothing keeps going up and the last buyers in will lose their shirts when it finally stops. Buyer beware.
The game plan for tomorrow should be packed with caution. Yes, the markets could rebound from here because of the -1000 point drop. Yes, the drop on Friday and the drop today form a classic double bottom. To be a valid DB the days need to be close together. The sell off steep and the second day needs to take out the low from the first day and rebound on heavy volume. All of which happened today. Volume could have been better and traders would have liked to see the Dow finish positive. If we rally at the open and then flat line or trend down the rest of the day then keep out. If we rally at the open and continue moving up during the day with advancers beating decliners by a strong margin then it is probably buyable. Just remember the flood of economic reports and FED meeting next week. There is a better than 50/50 chance that we will be having another Dow 10,000 party soon and they will not be drinking champagne.
Be very careful and if you must trade then you must sell too soon.