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Market Wrap

It's Always Darkest Before The Dawn

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       WE 10-06          WE 9-29          WE 9-22          WE 9-15        
DOW    10596.54 - 54.38 10650.92 -196.45 10847.37 - 79.63  -293.65  
NASDAQ  3361.04 -311.78  3672.82 -130.94  3803.76 - 31.47  -143.18
S&P-100  750.97 -  8.86   759.83 - 14.25   774.08 - 15.69  - 23.13  
S&P-500 1408.99 - 27.52  1436.51 - 12.21  1448.72 - 17.09  - 28.69
W5000  13142.10 -471.30 13613.40 - 64.80 13678.20 -135.50  -236.50 
RUT      491.02 - 30.35   521.37 +  2.55   518.82 - 12.06  -  4.82
TRAN    2543.65 + 22.01  2521.64 - 75.50  2597.14 - 74.32  + 19.86
VIX       25.67 +  1.82    23.85 -   .32    24.17 +  2.24  +  1.24
Put/Call    .75              .59              .56              .65

It's Always Darkest Before The Dawn

The air is getting colder, the leaves are changing colors, and technology stocks are getting hit...it must be October. Not only are we seeing the same signals and warnings that are common for this time of year, but the feeling of despair is the same too. Why is it that investors always feel the economic world is about to end this time of year? Who knows why traders do what they do sometimes, but if history repeats itself, the market could be setting up for a bottom in both the short and long-term. That is what has always struck me as bizarre in trading during this time of year. How one week the trading world is coming to an end and the next week the future could not look brighter. Nevertheless, let's dissect the carnage and separate fact from fiction.

Like always, the Nasdaq will get the first look. Obviously, it has been stuck in a downward range for five weeks. Here is the chart of the Composite that I posted in last Sunday's Wrap.

Now compare it to this week's chart. Yep, the same trend is in tact. In trading the recent market, this indicator has been my first stop. It is the ever-exciting, range-bound action, culminating in a 300-point loss for the Nasdaq this week. The news has been bad and the volume has been big. Still, we have held true to this range for weeks and it is telling us that we are currently at the bottom of the range. That should give an upside bias for the coming week, but remember this is still a downtrend. A successful week in a down-trending range just means you will be lucky to end the week flat on that index.

This is a very tough market for traders to make money on. The more likely scenario is that you will get swung in and out of trades constantly for little profits. But it is an exciting time as well, considering that big moves may be waiting in the wings. So now let's move on to the longer-term view, which seems to be coming to a head here against the short-term pattern.

This next chart shows just what I have been waiting weeks for. We are headed into the second week of October and fear is rising. The VIX is back above 25 and the Nasdaq has traded down over 20% since September 1st. We have been stuck in the pattern mentioned above, but will face strong long-term support shortly. Some analysts have been talking about retesting the May lows down around 3150. It looks like they may get their wish. With the Nasdaq at 3361 and maintaining the current trend, we should be there late this week or early the following week. Does that mean we will have a major event? Not necessarily, but the odds are definitely increasing as the two forces collide. Either the support has to hold and shoot the Nasdaq up and out of the current range or the support will fail and the losses will accelerate. Which will happen? I will make my prediction below, but it is important to recognize the factors at work. Here's the chart...

The strong Jobs report was the kicker on Friday. Analysts had expected a gain of 235K new jobs and unemployment at 4.1%. Instead it got 252K and a shocking 3.9% number on unemployment. Traders didn't really know how to react to this and it produced some choppy action. Fortunately, there was an absence of wage pressure or trading may have been real dicey. "Job gains were very strong in the services industry, but the overall employment change was tempered by widespread job losses in manufacturing," the government agency said. This report can't make the Fed happy, but there are factors to keep the Fed sidelined, like a sinking stock market. While this report wasn't good, it didn't strike me with a sense of fear like it did for some. The market has likely already factored these numbers in.

The DJIA had a rough day on Friday too, dropping 130 points. This is unfortunate due to the fact that it had been trying to move up and out of a consolidation period from the past two weeks. Volume was steady at 1.15 million shares. The omission of major analysis on this index is not an oversight. Let's face it, it's October and traders are talking tech. I have seen too many traders burned when buying the supposedly "defensive" plays in this month. While a break of support at 10,500 would be discouraging and require a deeper look into the crystal ball, until it happens we will keep focused on techs. Besides, the DJIA will again run into a lot of technical congestion soon after such a breakdown.

Now we are about to kick-off the earnings season in earnest next week. We will see International Paper, General Motors and General Electric from the Dow Industrials. Plus many big names in the Nasdaq like Yahoo, Juniper, DoubleClick, Veritas, PMC Sierra and KLA-Tencor. Not to mention some tech stocks sitting on the big board like Gateway, Motorola and Seagate. The hope here is that some solid earnings numbers will help to curb the tide of negativity that is sweeping across Wall Street right now. First Call noted that even though negative pre-announcements have been heavy, the impact on aggregate estimate revisions has been relatively light. And expectations for earnings growth were trimmed no more than the normal amount. The number of negative pre-announcements currently stands at 351, up 25% from the same time last year. Expectations for 3Q growth in S&P 500 companies are now at 15.9% versus the 18.8% growth rate expected on July 1st.

As mentioned in previous articles, you never know when the October fear will subside, but it will come eventually. The first indication will be the Nasdaq breaking out of the above range. I breakout to the upside should mean the emergence of a new trend and the end of the selling pressure. Markets cycle and the current range (lasting nearly six weeks) is getting old in a hurry. That should encourage buyers. On a similar but different note, a breakdown out of the range may also have positive implications. If we were to see a real capitulation where the Nasdaq gets slammed and trades 3000 (or less!), then you have got a situation that many will point to as being way oversold and a buying opportunity. Is my bias showing? Either way, I want to see a move out of the this down-trending channel.

The more bleak analysts paint the picture, the more I want to do some buying. Some are feeling the pain as the Nasdaq nears 35% off the year high, but some of my favorite companies are trading at prices I wouldn't have been able to imagine a couple months ago. The last time I felt this fear/opportunity feeling in my gut was last October. And that was the entrance to the biggest bull run on record. Will it happen again? No one knows for sure, but I have just one remaining thought..."Those who forget the past are condemned to repeat it." Therefore, I am looking for that gut feeling where the sentiment switches back to bullish. Some of you may know what I am talking about. It is like a switch was flipped and the mood and markets reverse on a dime. It may take days or weeks for confirmation and knowing when the timing is right is half the battle, but you always remember the instant it turned. Until then, don't buy too soon.

Also, Jim sent in two articles from the John Dessauer Seminar in Switzerland today, be sure to look for them. One is listed below and the other is in Editor's Plays.

Ryan Nelson

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