This ‘Rule Of Three’ May Get The Naz Back Above 2200
I
would like us to re-visit my last article because I feel it can relay two things
to readers. First and not as important, it shares my thoughts on the
market, which seem to be fairly accurate right now. Secondly, and most
important it gives a great insight on how I trade stocks in the market and
enables me to teach how I build on a theme first-hand. In my mind, this not
only helps me make an educated guess, but confirm that educated guess.
My first point of the last
article was that the Fed did what everyone expected: raised rates. When you see
an important event in the market, you will see prices adjust and re-adjust
leading up to the event, and as long as the event does not offer any surprises
then you will likely face a reaction immediately following the event; in
laymen’s terms: Buy on the Rumor and Sell on the News.
Another significant point is
that as long as there are no surprises, and everything else is equal you will
eventually see the market continue on the path that lead up to the event. Out
of all of this, we were in a confirmed uptrend in the market with the NASDAQ
leading the way and it that has not changed.
Now I will fast-forward us to the end of the last
article where I stated: “In the current
market, we have had fairly optimistic views from the majority that prices are
going higher. Since the majority is seldom correct, the market probably has to
do something to cause worry and concern. The current pullback the NASDAQ is in
has been too perfect.†Since this was written on Tuesday, I could
not have known we would see one of the things I was looking for: a reversal and
heavy selling in the indexes. Take a look at a price and volume chart of the
market for Wednesday’s trading:
“We will
see if it attempts a shakeout (in which to buy) before spurting higher.â€
This statement followed the above
quote in the last article and was exactly what Wednesday handed traders in a
proactive mode with a theme in place. It is much better than reacting to a
reversal that one could not see coming. As I stated in the beginning of the
article, there were two points to talking to you in this column. By now the
first point should be clear: I think the market is headed higher over the next
2-4 weeks and probably propels the NASDAQ through the 2,200 level. The Rule of
Three appears to be in effect and you may want to re-read the past article for
more information on this thought.
The second point can be made now as I summarize building a theme in the
market. In early May when we at True Capital Management saw a follow-through
day and switched from bearish to Bullish. We did not invest all of our money,
but put a few dollars to work in anticipation of this. Trading against the
sentiment is never bad, and everyone was fairly bearish at the end of April in
seeing the NASDAQ set new lows. As our trades worked, and the follow-through
day appeared, we realized more money was needed in the market; so we looked for
small pullbacks that offered buying opportunities. As the market continually
pushed through resistance (50-day moving average, then the 200-day moving
average and finally 2,100 on the NASDAQ) the theme of a bullish market
strengthened. It takes a significant accumulation of bearish events to de-rail
us as the theme grows stronger. With this theme strongly in place leading up to
the NASDAQ’s approach on 2,200, it is only a matter of time before it moves
through it. I talk about this so strongly right now, because the next major
resistance does not appear until 2,800 on the index. Even from 2,200, that is
over a 27% move in the market, not to mention what we’ll probably see out of
leading stocks. From an established stance, we are always looking to build the
theme even more, and with so much bullish sentiment going into the Fed meeting
and that being my biggest doubt, the perfect answer was for the market to change
people’s minds. As I said, bullish sentiment was strong leading up to the Fed
meeting and almost guaranteed we would not break above 2,200 yet. It seems to
have resolved some of this on Wednesday and let me illustrate.
TradingMarkets.com editor, Eddie Kwong called me today and said that I wrote the
only bullish article on the site in the past 24 hours.
Are we out of the woods from this correction of the first two attempts through
2,200? Absolutely not. With a strong bullish theme in place and only one
reason to be bearish I cannot run for cash, but I can see if that bearish theme
builds at all over the next couple of weeks. The one bearish note I have made
was that Thursday’s volume came in lighter than Wednesday’s distribution.
Naturally, it is perfect to heavier volume into rallies than declines. But
since it is so small and could easily be rationalized and even used to keep
participants out of the market, I keep it from making any big decisions right
now.
We will continue to watch the market daily and eventually build on our current
theme or establish a new one. You know where we currently stand and whether you
agree or disagree with that opinion, I wish you the best and Good Trading around
you Theme in the market.
Tim