The Nasdaq Composite closed just ever so slightly back above its 200 day moving average on Friday. While some of the index’s perceived “untouchables,” such as $AAPL and $AMZN, may be vulnerable here, there have indeed been many stocks in the Nasdaq that have held up remarkably well in this downturn, such as $CSTR, $FFIV and $RBCN. The updated and annotated daily chart of the index, seen below, illustrates the crucial levels of overhead resistance suddenly at the forefront.
Looking forward, I see a few possible scenarios, seen below. I have denoted my scenarios with the light blue lines. Note that some of them may seem to overlap in certain aspects. Feel free to chime in with your own scenarios as well.
The bottom line is that the bulls have a lot of hard work ahead of them, if they are going to put together anything more than a dead cat bounce. However, keeping an open mind is crucial, so as to not let your bias prevent you from taking advantage of opportunities.
Great stuff Chess.. Can’t wait to see how this plays out… like you I have gone to mostly cash (and a couple little shorts in index ETF’s mostly to hedge my one long position in E*Trade). My Gut tells me scenario 1 or 3 are the most likely, but then again my gut is usually wrong. Thanks for the charts and the usual great TA you do.
Thanks, Dave.
Chess- I enjoy your posts. I agree with the downside scenarios. But not many are calling for a rally, making me think the correction is over and the market will go on to draw more people in before collapsing.
I have been delta hedging by selling a lot of out of the money puts against inverse ETFs (analogous to selling OTM covered calls against my long holdings in retirement accounts). Do you do much hedging or just stay in cash?
Brian
Thanks for reading, Brian.
I prefer cash in this kind of a market. We haven’t had a death cross or a down-sloping 200 day m.a. on the SPX yet, so I have been reticent about shorting. However, we have been in an unhealthy market. So, cash is king for me until proven otherwise.
Or we’ll have a random triple bottom (which “never exists”) and bulltastic rally. I would love to see the short squeeze out of that one
Nice–could be.
Great discussion
#1 and #3 to me seem just to predictable, the bears would love it .
. #2 would require some amazing good news
this earnings season .So my bet is on #4 . We get a run up here on weak volume,
just as the longs get fully committed it rolls over on some bad news out of europe .
RBCN does look good , nat gas stocks as well, CHK maybe flagging, will watch for a BO.
Maybe time to make some money on the long side for a bit.
Thanks, hooper. Should be interesting.
I like scenario 3 better than the rest. I think #2 is out of the question-bull market. Scenario #4 is the obvious head and shoulder, it doesn’t have to be this obvious, wasn’t obvious in 2008. Overall, I think the reversal to the downside will happen next week instead of later. I guess many people are expecting a short term rally. The best way to do this is to fool people into thinking the new bull market has begun and quickly reverse to the downside.
My first vote would go to number 2, because no one expects it. Second would be number 4 since it would screw both bulls and bears.
Irregardless [sic] , nice work as always.
I hope you are wrong. I’m expecting a bear market for a couple of years. Look at the economy and all the things that are going on-oil spill, currency crisis, inflation, home default, etc..
Exactly! We’ve been in a bear market since 2000. How much more pain do you want? I’m not calling for a new bull market. I’m just saying that the vast majority of people would not expect a retrace to the recent highs.
Good discussion between you two. Thanks for commenting.
The only reason I think #2 is not possible is because there just isn’t enough fundamental to support it. I think #4 might be possible with a small down dip before hitting around 2300…. and then back down.
It is always possible that we chop and slide sideways for a good long while…
The assumption that we must collapse is so widespread, so widely held, that it almost can’t come to pass… it would be really uncontrarian anyway, if it did
Good points, thanks.
… not to sound all gloom-n-doom …and shit …
but …
I’m rollin’ with the “Prechter Scenario” !!!
—
SURPRISE … SURPRISE !!!
.
Number 3 for me. Besides everything else worldwide that is going on, we have major problems here at home that the media has pushed under the rug.
Chess,
Great stuff, as usual. Always look forward to your posts.
I am certainly more bearish than bullish, but need to keep a clear and open mind. These charts have helped me to realize a couple of very possible outcomes.
I would favor scenario #4 as the most likely out of the bunch as we may see some low volume buying in anticipation of Q2 earnings season, but may disappoint and virtually head lower. I think this may be the last leg of retail investors, which always seem to get burned. Low volume would be a result on non-institution buyers.
Naturally, if the overall earnings are very positive, scenario #2 could also be a possibility. Doesn’t seem as likely, but didn’t seem that way in Feb either.
Short term, I do think we can see some upside potential, but overall, there are some tremendous headwinds. Will be very interesting to see how it plays out.
Thx!
Thank you for reading and for your thoughtful comments.
Most Americans don’t even know the rules of Soccer, yet they purchased the most tickets for the World Cup outside of the host nation
what does this mean about the economy? I don’t know
I am leaning towards this is the low for a while, perhaps even for years
we need to really blast back through the 200day MA and soon or else I would be bearish
My question is, if #2 happens, when would you go long? I would, on a break of the high from the candle 7 trading days ago.
By the way, I’m assuming you are good at chess? I started playing again and am looking to get better…any hints, aside from just playing a lot? Thanks.
I would go long on Scenario #2 upon an orderly, benign consolidation after the break out. Of course, if volume is strong on the break out, I would consider taking initial positions then as well.
The two best books I can suggest for chess are: http://amzn.to/9YhGcY and http://amzn.to/bWv2sN
Pandolofini and Acers are excellent thinkers and highly accomplished players.
Hi Chess,
Nice post.
I wonder why u analyze Nasdaq and not the S&P.
good question–I usually analyze the S&P nightly with an updated chart, but the Nazzy is crucial. So, on an occasional weekend I will post about it.
Thanks for reading.