In the near term,Â specifically over the next few weeks, I cannot help but be bullish. Therefore, I am officially changing my bias from short to long. Mr. Jeremy will hopefully see fit to remove the Bearshitter from my banner, given my near-term sentiment change.
Will the market go up or down, over the next month? IÂ suspect up, but that is just a hunch or an intution; some might even consider it a guess. The odds of such aÂ move are probably no better than 50/50. However, the reward/risk for trading a possibleÂ move up can be better than 2:1, using current support levels as a stop area.
Regular readers may remember my calls a couple of weeks ago that the Nasdaq would see 2000 and the Dow 11,000. I still think that is probable. However, I think we will move up first. Let me explain why.
First of all, I feel very strongly that we will remain in a protracted bear market. I do not think that earnings or the economy will recover in the 2nd half of 2008. But, as I’ve said before, I’m a technical analyst, not an economist or a fundamental analyst. The technicals show that the indexes could experience a significant rally, and still not break the primary downtrend. Such a development will be bullish short term, but will not violate my principle belief that we are in a bear market.
In 2000, it took approximately 9 weeks for the Nasdaq Composite to regain its 50 day moving average. It then traded above the average for the better part of 12 weeks, before again breaking below the 50 day. On the second break of the 50 day average, it proceeded to trade beneath this average for 19 weeks before againÂ breaking above it. I expect a similar type of scenario to unfold over the coming weeks and months.
Â We just witnessed the failure and implied bankruptcy of one the top five broker/dealers. What was the market’s reaction? Well, the crowd went mild. When we witness theÂ destruction of a financial instutionÂ on the level ofÂ Bear Stearns, and the market does not follow through with a negative reaction, I am at a loss as to what could drive the markets to new lows, in the near-term. Long term, I see a dearth of consumer spending and weak earnings driving the indexes to new lows. However, it will be a while before there is enough data for that scenario to become reality.
ThereÂ will beÂ constantÂ risks for the bullish,Â such asÂ the failure of another financial institution. I do believe that the Fed’s recent action will be enough to stave on any more crises, for at least a few weeks.
The headline risks are also present. S&P downgrading [[LEH]] and [[GS]] comes to mind. But seriously, what the hell is a downgrade going to do that a bankruptcy could not? And who believes anything from the S&P? There is always going to be the opportunity for negative economic reports, such as the GDP on Thursday. In the near term, IÂ feelÂ that any bad news will be treated as good news, and we will hearÂ plenty about events being “priced in” and “the market looking six months forward.”
I plan on scaling in toÂ [[DIA]], [[SPY]], and [[QQQQ]]. I will use support under each index as a guide for stop placement. As my thesis is that the indexes are finished retesting lows for now, IÂ do not want my stopsÂ placed beneath the lows. Rather, I want them just under recentÂ support, $120 for DIA, $42 for the Qs, and $129 for the SPY.Â If these levels are busted, the market is still wanting to test lows, which will invalidate my plan. With stops at these levels and purchases near Thursday’s closing prices, the reward to risk on these can be 2:1 or better.
If the indexes can regain and hold the 50 day, then I will add to the positions and move my stops up.
Let me reiterate that I’m still bearish long term. Technically speaking, the short term momentum is moving in favor of the bulls. If one looks at bear markets, there are always rallies. Those who do not see a rally in the near term should be asking themselves what exactly will keep the indexes from a rally?
Bonus Read: An interestingÂ primer on BearÂ Markets from Schwab: A Bear of a MarketÂ