Tuesday, January 08, 2008

Mid-week note on the market

The market has been noticeably weaker than I expected in my weekend note. After several attempts of early morning or intra-day rallies failed, the market rolled over into the close today. The sharp drop today has every major indices made a lower low, which completes the first concrete signal of the primary trend reversal (after made a lower high in last Dec.). Such major trend reversal signal could be further confirmed in the coming days if the major indices break and close below their Aug'07 lows, which are really just a stone throw away (Russell 2000 has already done so).

As the NASDAQ leads the market breaking down with 8 consecutive losing days and counting, fears are tuning into panics as the volumes rose rapidly in the past two days with many sectors breaking down previously held bottoms. Buying the drop here is really becoming the catch-the-falling-knives act, but my gut feeling is that with the current deep oversold conditions, a panic-driven capitulation is what it takes to trigger a sharp technical rebound, and the panic may reach the extreme when the market tests its Aug'07 low.

The keys to catch the anticipated rebound are:

1. Pick the knives with the dullest edges, such as those solar names, agricultures/fertilizers, and even BIDU, AAPL, ICE.
2. Be patient with the attitude that you rather miss it than risk it. For example, given what's happening in the past two days, I will not catch AAPL unless it gets close to 162 with stop just below 160.
3. The entry point must be very close to a well-defined strong support, which will be used as the stop-loss should the knife falls through.
4. Must place the stop-loss or the falling knife will hurt you!
5. Don't be greedy when the rebound occurs because the rebound is against the overall trend, lock in profits by raising stops or scale-out the position.
6. Finally, consider reverse the position when the rebound runs out of steam.

OK, I think I am ready for a gap down and a test of the Aug'07 lows now. You?

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