Saturday, January 13, 2007

Weekly assessment of the market

The NASDAQ bulls took firm control in the past week, broke out the 2 month plus trading range, and driven the index to the highest close in 6 yrs. Along the way, it also helped to lift DOW to new high and SP500 within a hair of new high. On the weekly chart, the candle formations are bullish for all indices, with many indicators point to more upside move. Similar statements can also be made from the daily charts. For the past several weeks, I thought that the major indices were set for a significant pullback in the beginning of 2007, much like what happened in the Q1 of both 2004 and 2005, instead, they so far look more like the beginning of 2006.

The question now is how far the market can rise in the coming weeks. In my view, that will be largely determined by how tech leader fare during the Q4 report season, which will be in full swing next week, with major name such as AAPL, INTC, IBM on tap next week. If the overall outlook of Q1 from those companies is raised, I fully expect that market will have more room to run to the upside, on the other hand, if the outlooks come in below the expectation, the market could quick find a top and start a sideway movement with downside bias, much like what happened during the Q1 of 2006. Therefore, I will closely watch market reactions to major tech names following their Q4 reports.

There are some concerns for the bulls. First, on the weekly charts, there are still some divergences between the price movement and the Stochastic/MACD, which put some doubts on the up-momentum. Second, the market now has risen nearly 6 months without any meaningful pullback, and you know it is just a matter of time such pullback will happen, and more than often it occurs to the surprise of the mass, which sounds like could be anytime now.

There are some additional concerns in my view. I have noticed that a lot of world markets have seen a lot of volatile movement lately, which makes me feel that the top may be closer than thought. A fresh concern I have is the dramatic decline (nearly 3.7%) in China stock market this past Friday. The news is pretty much ignored by US news so far, and other major indices in the region largely shrugged that off, however, I will be alerted if the steep decline continues next week, which may spread the fears like wild fire before you know it.

I may revise the assessment before next Tuesday when the market reopens.

Comments are very welcome!

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