US Stocks, countertrend surge starting next day or 2 ?

The Nasdaq 100 etf (qqqq) continues sharply lower, but into support in the $46.00/50 area (both the base of the bullish channel since March 2007 and the base of the bearish channel from last Oct, see daily chart below).  Note too that the market is quite oversold after the last few weeks of significant declines and suggests that a few days of sharp short covering ($2.00-2.50, approx 7%) may be nearing.  Note that such a bounce would be seen as a correction (wave 4 in the fall from the Dec 11th high at $52.84), suggesting another downleg to new lows after (within wave 5, see “ideal” scenario in red on daily chart below).  For now, would wait for this short term bounce and levels toward $48.70/85 to short.

The Nasdaq 100 etf (qqqq) continues sharply lower, but into support in the $46.00/50 area (both the base of the bullish channel since March 2007 and the base of the bearish channel from last Oct, see daily chart below).  Note too that the market is quite oversold after the last few weeks of significant declines and suggests that a few days of sharp short covering ($2.00-2.50, approx 7%) may be nearing.  Note that such a bounce would be seen as a correction (wave 4 in the fall from the Dec 11th high at $52.84), suggesting another downleg to new lows after (within wave 5, see “ideal” scenario in red on daily chart below).  For now, would wait for this short term bounce and levels toward $48.70/85 to short.

 

In regards to this countertrend bounce higher, it is expected to be very sharp, but short-lived.  On closer inspection, it appears that the market may be forming a falling wedge over the last week, common after sharp declines and a pattern that resolves sharply higher.  However, there is risk for another days or so of chopping within the pattern first (see “ideal” scenario in red on hourly chart/2nd chart below).  Due to the potential for a sharp upside resolution and only if very short term/aggressive, it may be worthwhile playing this surge higher via very short dated options (expire a week from Friday).  Only assuming that the market plays out as expected, would start to buy calls on slight new lows and then add on a break above the ceiling.  Remember, this upside surge is only expected to last for a few days, so would not by shy about starting to take profits on a $2 upmove.   

 

Long term, the bearish view over the last few months (a top for at least the next 12-18 months) remains in place as the Oct high at $55.07 completed the 5 wave rally from the June 2006 low at $35.54 and likely the whole rally from the Oct 2002 low at $19.59 (see weekly chart 3rd chart below).  This continues to target eventual declines toward the base of the 5 year bullish channel (currently at $42.00), $37.50 (50% retracement from $19.59) and possibly below.  However, its not expected to be months and months of sharp declines, but more likely an extended period of wide, downward ranging with good nearer term opportunities to trade both sides of the market.  

 

[NP][/NP]

 

David Solin
Partner, Foreign Exchange Analytics

Foreign Exchange Analytics has it's roots in both the emerging information technologies and the global economy that characterized the last two decades.  As currency transaction volumes soared in the wake of the 1985 Plaza accord, the need for timely concise information on what forces were driving and would drive exchange rates became critical.   David Gilmore was one of a new breed of analyst that saw a void of relevant, market moving... More