2100 And Out

By Duru

June 5, 2005


I never cease to find wonder and amazement in the market's ability to provide meaning to key technical levels and nice, round numbers.  We can find even more entertainment in watching the market sentiment swing from one extreme to another.  Just five weeks ago, we witnessed the markets swoon with rampant fears about a slowing economy, higher inflation, higher interest rates, and over-leveraged hedge funds that were about to blow up and take us all with them in one big nuclear blast.  Since then, we have enjoyed a slow and steady grind upwards in the major market indices.  I think the current excuse is that the market anticipates an imminent end to Fed rate hikes.  Other than that, I really could not tell you why the market has gotten happy all over again and so quickly.  I will use the NASDAQ as today's scapegoat to explain the market's latest madness.  NASDAQ's rise had been so persistent that it wasted no time in sprinting right through the psychologically important level of 2000.  That move told us to believe in the rally, especially since we bounded above the 200 daily moving average at the same time.

This past week we watched the NASDAQ conveniently stall out at 2100 for the fifth time since the bubble collapsed in 2000.  I have already pointed to this level as a long-term eye-sore for the Nazz, and my man Mike gives some good views of this action.  Mike's monthly view of the Nazz could provide a glimmer of hope for the bulls (a weekly chart works as well): notice that after the sharp upward burst in 2003, the NASDAQ has essentially printed two higher highs and two higher lows.  These patterns have occurred in subtle form even while the path to these levels has been fraught with lots of drama on the way up and down.  I would look for the index to repeat with a marginally higher high and correcting back towards the April, 2005 low, before making a serious charge at a true resumption of any bull run.  You should expect the media to blame the usual suspects for every tick up and down as we seemingly go nowhere: oil, interest rate sentiments, Fed psycho babble, the latest economic release, and perhaps a geo-political event or two.  There are all sorts of other fun levels to watch to tell us whether the market has finally decided to do something truly different.  For example, we could keep pushing past 2200 (the last high), re-test, and keep going higher - that would be a time to get very bullish.  Or, we could head lower and fail the test of support at the April, 2005 lows and provide more panic as we ponder the implications of a break of the Aug, 2004 lows - that kind of move would be truly bearish.  Otherwise, betting on the same old drama we have seen the past 18 months looks like a great bet.  I really have no strong opinion on what the next move might be since I cannot rest my finger any compelling story.  Not even our trusty 50 and 200 daily moving averages have provided reliable and lasting trading or investing signals during these 18 months of churn and chop.  And each time these indicators fail to do their job, you can bet the market's attention span shortens more, and we get even more churn and chop in the market.  Wash, rinse, repeat.  Wash, rinse, repeat.

In summary, remember that the economic data as a whole looks very mixed, and this thing could go either way…or nowhere at all.  Perhaps the biggest wildcard remains what the Fed will actually do (as opposed to what everyone expects them to do).  The next Fed drama comes at the end of this month.

Be careful out there!


© DrDuru, 2005