Saturday, January 05, 2008

Weekend notes on the market -- Jan 5 ,2008

Bears are finally arriving!

There is no doubt that bears are more thrilled than bulls that 2007 is over and 2008 has started. Friday's job report caught bulls off guard and the precipitous drop ended the first trading week as one of the worst on record. I am not going into chart analysis for the major indices since they are bearish all around regardless what time frame or angle you look at, just some thoughts:

1. The housing mess is definitely spreading, just look that the retailer index or almost every consumer-driven companies' latest earning reports (pharmacy, retailer,restaurant).

2. FED will further cut rates, even aggressively, but the impact will be short-lived at this stage.

3. Institutions finally decided to take down their bull costume. For that, you may check out an excellent analysis on COT by the Smart Money Tracker (posted on Dec. 31, 2007).

4. Except Russell 2000, all major indices still have one more key support: NASDAQ around 2400, DOW around 12500, SP500 around 1370. But the chance that bulls final standing at these levels will be firmly breached in coming weeks has dramatically increased.

5. NASDAQ is leading the downside move, and yesterday, the big caps on the NASDAQ were sold off aggressively. Such fact suggests that if anything, the down trend is in its early stage.

On the overall trading strategy for the coming weeks:

This week's huge drop came in on relatively light volumes overall, this plus the fact that many stocks are in oversold conditions, I expect the market to rebound in coming days, therefore I may still play the long-at-bottom setup for those that are still in clear uptrend and have a very defined support nearby as stop-loss references (best example: AAPL, entry zone=170-175, stop just below 179, IT=190), but I will use smaller size and shorter holding time. However, the best strategy is using any rebounds to build up short positions. Bottom line, the psyche of the market has clearly changed, and while the time may be yet to come for easy money to be made on the short side, sticking on the long side is getting more and more dangerous.

Will post my trading calls soon.

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