As The Market Turns
About an hour before the 2:05 p.m. ET
turn in Tuesday’s market, I was shown an email from a TM member asking if he
should begin counting the distribution days since the O’Neil follow-through day
in the Naz.
The member said Tuesday’s action was
on its way to constituting a third distribution day and he was contemplating
exiting his positions.
It seems as though a number of
intermediate-term players are growing impatient with the Nasdaq’s performance of
the past week.
They’ve become accustomed to the
recovery periods of the past year or so, in which the market bottomed on husky
volume and shortly thereafter generated potent breakouts by dozens of growth
names.
This time around, there are two
differences.
First, volume has not kicked in on the
Naz.
Second, there obviously was much more
damage done to tech than in any recent correction.
When you realize that the Comp slid
nearly as far in 11 weeks (41% intraday) as the S&P did in nearly two years
during the ’73-’74 bear market (about 45%), you can’t expect the market to just
snap to attention immediately and jump right back to the old highs.
The reason is “resistance,”
i.e. the tendency for many participants to sit on a loss until a stock recovers
enough to allow the investor to sell in order to break even or get close to
breaking even on a position.
This selling creates friction, or
resistance, as a market moves higher.
And there are tons of folks out there
that are sitting with hefty losses on paper who remain negative on the market.
When the volume returns to this market
in spades — and of course it will at some point — is anybody’s guess.
In the meantime, it’s best to have
reasonable expectations as to what this market can manufacture in terms of gains
to the intermediate-term trader.
I’m looking at the glass as half-full
for this reason:
The Naz ran up 28% on an intraday
basis over 11 sessions.
The fact that it has given back a
minor amount of ground on thin volume is an objective indication that
profit-taking remains light, and not what you would expect given such an
explosion in price during the preceding 11 days.
And despite the slack volume overall,
a number of speculative growth stock glamours showed strong activity when they
surged June 1 and 2.
Most of these are now pulling back,
yet the volume on the pullbacks is not anything close
to distribution.
So as of this moment, I’m giving the
market the benefit of the doubt.
It’s come a long way in a short period
of time and deserves some rest.
Of course tomorrow could bring
something entirely different.
But that’s the beauty of being a
trader, as opposed to being an analyst or strategist on Wall Street who must say
“I’m a bull” or “I’m a bear” to reporters, clients, etc.
every day of every week.
The problem with that is that the
Street analyst/strategist eventually will be wrong, but will feel painted into a
corner, unable to change his outlook without appearing wishy-washy or
“weak” in front of clients, not to mention a TV audience.
The trader doesn’t need to make such
predictions.
As Bill O’Neil says, all he or she
needs to know is what’s happening right now.
This is what brought me off my 100%
cash position during the first few days of February, put me in a 100% cash
position on March 14, moved me into a few of the electronics-relateds in
late-April (I was stopped out along with everyone else), and moved me to a
fully-invested position on June 7.
In each situation, I didn’t predict
that a new bull or bear move would begin, because I didn’t know. I don’t own a
crystal ball.
I merely acted on what I saw happening
in the there-and-then.
What would make me cautious at this
point?
A few distribution days in the Naz and
some distribution in the glamours.
The usuals.
In the meantime, as always, I’m taking
things one day at a time.
The benefit in seeing some of the
vogue names come down is that it affords the intermediate operator new pivot
points — pivot points that didn’t exist a few days ago.
Monday, I mentioned Brocade as one
example of this.
Another is Medimmune
(
MEDI |
Quote |
Chart |
News |
PowerRating).
Another is Nvidia
(
NVDA |
Quote |
Chart |
News |
PowerRating).
I must admit that a certain Street
adage has been coursing through the far recesses of my head lately: Never
short a dull market.