Where’s The Euphoria When You Need It?


What a
The investors who were
euphoric going into last week suddenly found themselves questioning their
judgment.  Perhaps the optimism for
a speedy economic recovery and the enthusiasm to jump on the tech bandwagon last
week was a little premature. Perhaps it
was a little unwise to drive the already high-priced tech stocks higher in front
of the earnings pre-announcement season. The
Sun Microsystems (SUNW)
warning on Tuesday night certainly caused a mild panic in the markets Wednesday,
leading the Nasdaq to retrace to the 38.2% level of 2105.
The trading world focused on Sun’s statement admitting to weakness in
Europe and Asia — was this really a surprise to everyone?
Apparently it was, given the gap down and sell off yesterday.
Of course, we also got a Morgan Stanley downgrade of the Optics sector
(specifically (JDSU),
and (SCMR)
and an end to merger talks between Lucent (LU)
and Alcatel (ACA).
While the market was certainly due for a pullback after such a feverish move up,
the slow bleed from last week has resulted in a complete “give-back”
of all our gains from the “break-out” we experienced above recent
resistance levels.


As I showed in my column last
week, the candlestick formation on the Nasdaq daily chart after the May 21
breakout gave us a heads-up for the potential weakness in this index. 



The evening star candlestick
formation clued us in to the weakening of bullish resolve after the break out
bar on May 21. After trading sideways
into the holiday weekend on incredibly light volume, the market turned negative
and quickly collapsed to the bottom of the trading range of the last month and a
half. So far, we are clinging to the
38.2% retracement level of 2105. A loss
of this level brings us to the 50-day moving average at 2037, and below that a
re-test of the gap area from April 17-18. The
intra-day bounces we experienced intra-day Thursday day felt very labored and
weak, so the upside at this juncture may be limited.
We are, however, short term oversold, and the market is due for a rally
of some sort from this level of support. A
move above today’s high may give us a chance for the 2200 level.
The impetus for a move up (or down) will most likely come from the May
unemployment Friday. The chart certainly
doesn’t look healthy, and without some positive impetus, this index could
certainly hit some air pockets to the downside. 


Moving on to the Dow Jones
Industrials, we again see support holding at the bottom of the break out bar
from May 16.



If the market interprets the
employment number positively tomorrow, we may see a nice rally off this support
level. If negative however, the bears are
sure to help accelerate the move below 10,800 to push this index to retracement
support levels. Should the 10,800 level
fail to hold, the breakout from last week will be construed as a failure and
create more resistance for the index to deal with.



Looking intraday at a 5 minute
DOW chart, we were given very nice signals for a long day-trade.
As I watched the market push lower mid morning today to re-test the
10,800 area, I noticed that the TICK (up/down ratio) was not pushing deep into
negative territory.  After 30
minutes of trading at the 10,800 level, the tick only registered meager —60
and —70 readings, a sign that sellers were not aggressive at these levels.
After another pull-back right around the lunch hour that created a higher
low, the tick gave an extremely shallow pullback which showed the buyers were
willing to defend this level.  Day-traders
could have used this information, coupled with a low TRIN reading, to trade the
DIA or SPY on the long side to capture a nice 100 pt move in the index.




The daily chart of the CBOE
Volatility Index (VIX) shows the exuberance of last week wearing off a bit as
bullish sentiment subsides.  Without
anything positive to move the markets tomorrow, we may see a move back into the
27-28 area before buyers move in to buy the dip in the market.
The volume in the market for the past week has been abysmal and points to
a tough trading environment this summer if it continues.
The rest of the highly touted side-line money that didn’t get sucked
back into the equity markets during the April/May ‘train is leaving the
station-rally’ may be taking a second look at the overall health of the
market/economy (these two things are the same thing if we really listen to Mr.
Greenspan). The Federal Reserve is
nearing or is at the end of its interest rate cutting cycle, companies are now
eliminating the near term recovery everyone was banking on, layoffs continue to
rise, energy prices keep on climbing, consumer debt is at all time highs — not
much here to make a person excited about buying equities at these levels.
Of course, the Fed has given us a slew of rate cuts and is pouring
liquidity into the system at historically high levels plus we’ve got the
financial networks getting bearish again which can be a short term contrarian
indicator.  As this rally was not
fundamentally driven but was instead liquidity driven, the chances are that this
current trend will continue until overhead supply gains the upper hand.
Based on this alone,  I
personally think we get another move up before commencing a major leg down again
but my opinion doesn’t mean much — the market will do whatever it want to


I’m not going to recommend
any longs or shorts here. I’m not much
of a gambler with my money and hope that most reading this aren’t either.
Putting bets on how the market will react to the employment number
tomorrow would be akin to placing bets on a roulette wheel.
On a day-to-day basis, you never know how the market will react to
‘good’ and ‘bad’ news. If the
market sees a ‘bad’ jobs report with unemployment rising, it might be spun
as ‘good’ since it might lead to more rate cuts.
Or, it might be viewed for exactly what it is – just plain ‘bad’.
So, I for one, am flat going into the number tomorrow.
All the indices are at key levels of support here so once we see the
reaction, you’ll know what side you want to be on.

Good Trading