The Lay of the Land
I sure hope the snow storm doesn't muffle my holiday shopping this weekend!
Good morning and welcome back to the land of flickering ticks. With the recent pullback, the major averages have returned to early November levels and I thought this would be a good time to walk through our trading metrics. Make no mistake, these next few weeks are going to make or break many portfolios and tension levels are high. Our ability to remove emotion, remain lucid and trade proactively will differentiate our performance. Take a deep breath-and let's take a look.
Technicals: It seems that whenever we turn around we're at a seminal inflection point and this time is no different. Starting with the techs, the steep uptrend line from the October lows was broken yesterday and this is the first negative chart pattern in some time. With that said, the current zone is monstrous as we're sitting at NDX 1070 (November highs) and, perhaps more importantly, NDX 1050 was a zone that served as past resistance (current support) all the way back to my birthday (June 23rd). In the S&P, the October uptrend line was also broken and the next support is S&P 900-910 (followed by significant support at S&P 875). In the volatile semiconductor space, the SOX index is sitting right on the October trendline support after getting clipped for 10% the last two sessions (and 15% from Monday's high). For all of these indices, we can use Monday's highs as near-term resistance.
Fundamentals: The overall tone out of these conferences was (thus far) constructive as the stabilization thesis was reinforced. The issue at hand is whether, after the recent rally, that's already baked into current levels. We know that stocks are a leading indicator and, for the most part, that's why names that sounded 'bad' in October have rallied as they have (news is always worst at "a" bottom). The question for us, as traders, is whether we should be "selling hope" much like we "bought the despair." The CS First Boston tech fete (last day) and the Intel mid-quarter update should provide further insight today.
Psychology: This is the wildcard of the year-end prospects and, without a doubt, the most intriguing of the metrics. The current rally is almost a carbon copy of last year's lift and you can be sure that investors are quite conscious of the similarities. As we've discussed, portfolio managers who puked stocks into September's abyss last year can't afford (figuratively or literally) to make the same mistake twice. As such, they've been sucked into this recent move for fear of being left behind. The buy the dip mentality is self-fulfilling and bullish-until it doesn't work anymore. My concern is that traders seem resolved to the fact that this rally will continue to mimic last year's lift...and if we begin to roll over, there could be a bottleneck at the exits.
We've been harping on the "horizon" aspect of risk management and I think that's a critical element when defining an approach. Once you've determined a time frame, your decision making process and methodology will fall into place. Whatever you decide, remember that there are no guarantees when it comes to gaming the Minx. Put your best foot forward and trade to win-never trade "not to lose"-and always allow for a margin of error. With a lot of discipline and a little luck, we'll find our way through this muck to brighter times and better tapes.
Good luck today
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