Saturday, January 27, 2007

Weekend notes on the market -- Jan 27 ,2007

Bears trumped bulls for the second straight week that featured the most wild and volatile up and down days of 2007. NASDAQ once again led the market to the downside with a weekly loss of 0.6%, which further boosted the doubt that its recent break-out was a head-fake. Interestingly, both SP500 and DOW broke out with new highs on the Weds, but the extremely bearish actions on the Thurs raised the similar doubt on the break-out. On the weekly chart, the momentum of the multi-month uptrend virtually dissipated for all major indices. On the daily charts, NASDAQ closed below its MA50, but both SP500 and DOW are in much better shape. Candle formations for all major indices are clearly bearish, with some technical indicators point to further movement to the downside.

For the second week, the pattern of the market reactions to Q reports of the tech names remain as "finding excuses to sell". Stocks were unable to hold the initial gains in cases of YHOO, EBAY and MSFT. With more NASDAQ mega names (GOOG, SNDK,AMZN) on tap next week, I will see if the pattern can be confirmed. So far, it is fair to say that for a lot of tech names, their earning reports hurt their share prices overall. One more week like this, and we may conclude with some confidence that this Q report season is shaping up as a downer for NASDAQ, and may pressure the index for the next 2-3 months.

Technically, the multi-month up trend remains intact for all the major indices as long as NASDAQ closes above the key support around 2390. With NASDAQ now under its MA50, it is possible that it will test this key support this coming week. One thing I want to emphasize is that it is too far early to become really bearish about the market right now, if anything, Friday's action clearly tells you that the bulls are far from dead. On the other hand, Thursday's action says that bears are no long in hibernation. Consider all these facts, I think the best strategy right now is playing CTT setups at key S/R levels, and try to avoid any SW trades to minimize the impact of volatility.

One wild card that could really affect the market for the coming weeks is the movement of Chinese market. It has been up dramatically in last couple of years, and the upside movement accelerated recently. However, in the past couple of weeks, its major indices have had several huge one-day drops: just last week, it had a back-to-back 4% or more loss sessions. If the Chinese market experiences 10% or more pullback, the fear could spread to other markets, and trigger a sizable correction around the world. Keep an eye on this!

Will post the weekly calls on Sunday.

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