Chop, Chop

By Dr. Duru written for One-Twenty

February 7, 2008

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The bulls and buyers pulled off an inspiring emergency airlift program today after disappointment over Cisco's earnings threatened to take out everything. The trading on the day was apparently quite choppy, however. It looks like buyers stepped in right at the open and really accelerated into the 2pm "witching hour." Massive selling took the market swiftly down before a small recovery into the close. The day could have ended better, but the bulls and buyers will probably take this over the alternative of a true retest of the January lows.

TraderMike demonstrates some of the positive action in the market. Of particular note is that the QQQQ, the main ETF for technology stocks, pulled of a retest of the January lows ahead of all the major indices. But when I look around, I see that the bulls and buyers need to do a LOT of work still to confirm some kind of double-bottom.

For example, Cisco is still trapped in a vicious downtrend. Again, I was very impressed that buyers were able to resurrect the stock from as low as $21 in yesterday's after-market and today's pre-market. The monstrous surge in volume even suggests that Cisco will not see $21 again for quite some time, if it ever does. But first, it needs to "prove" itself by breaking through the downtrend.


More importantly, the VIX barely budged at the open today. This was your first sign that there was not much incremental fear in the market. Overall, the VIX is nowhere close to where it hit during the January lows. This suggests to me that the conditions for a solid double bottom are yet to come. I want to see that VIX spike again, and preferably higher than the levels of the January low before I get on the bottom bandwagon. (For now, I am maintaining 1200 as my target low for the S&P 500 this year).


In the meantime, it seems to me the market will mark time. Waiting until the next Fed excitement in March. Perhaps we continue to chop wildly between January's lows and the resistance levels directly overhead that sent us hurtling backward starting on Monday. Who wants to bet that the market will find something new to worry about to drive the Fed into even deeper rate cuts? Stay tuned!

One quick update before I leave you alone. About three weeks ago I noted that Flour Corp (FLR) had exhibited extremely bearish behavior by breaking down below a descending triangle pattern. I noted that this pattern increased my skepticism about that infrastructure was a good place to hide from recession fears. Since then, the stock has struggled to maintain its composure and the 200DMA. Today, it broke decisively below the January low on high volume. My bearish position was completely closed out today, but I hope to re-establish a new bearish position - assuming conditions continue to show weakness (see disclaimer here).


Be careful out there!

DR. DURU®, 2008