Three Possible Outcomes For This Market

January 14, 2003
Dave Floyd

While yesterday’s market traded quite technically,
respecting Fib levels and pivots, it did so in its usual manner, slow and
deliberate.Â The exception was the morning reversal which simply brought the S&Ps
back to 921, the pivotal Fib level which has contained upside and downside price
movement in many sessions.

Naturally, it was a market where patience was rewarded, and immediate
gratification was not.Â This has become the common theme in recent months.Â A few
great setups followed by long periods of solitaire, coffee or Internet
surfing.Â The market has three possible outcomes at this juncture:

Earnings make an incredible rebound in the first two quarters

Capitulation, which brings the market in line with historical valuations
in a bear market environment

The market will continue to meander until earnings and fundamentals catch
up.

Reason three is what appears to be happening, and as a result, is making for
a very frustrating environment.Â This has the potential of lasting for several
months if not a few years.Â Get used to being a cherry picker.

I was talking with a fellow trader in London who was echoing the same
concerns about that market.Â

“…capital preservation, which is key, but it’s
hard not to trade when trading is your sole form of income. Every time things
look set up, like today (started buying), by end of day things look grim
again.”

This trader, from what I gather, is good (up 10% in
last six months), so he obviously recognizes good setups.Â But like all people,
we get bored and anxious and begin to see things that may not be there to begin
with.Â I know this is a repeat for most people. I have been yapping about this
for a few weeks now, but it is the environment we are in. The headline in
Michael Belkin’s
report yesterday summed it up nicely; Investing in a Warped World.

Naturally, the Retail Sales report (already released)
will be pivotal in determining the price action early on.Â Nonetheless,
yesterday’s early morning rally, then selloff, put a dent in the short-term
technical picture. Take a look at the chart below.

In addition, yesterday’s rally was accompanied by a
divergence in NYSE breadth, total volume and TICKS.Â Again, simply observations,
but it appears as though the most recent leg up (since 1/2/03) is getting a bit
tired.

Depending on where the price action ultimately takes
us, the stocks below represent good trading ideas for a longer- term play, i.e.,
several days or more.Â