Wednesday, March 21, 2007

The Nasdaq Follows Through

See a previous post of mine about the Follow Through Day here.

I have to say that I'm really suprised at how quickly the markets have righted themselves. I have surmised that Blue Tuesday and the subsequent days' action was so shocking that the sentiment changed to contrarian levels of bearishness much more quickly than in the past. I believe the extreme bearishness and the resulting record level of puts and short bets that were made effectively drained the firepower of the bears in a very short time. High levels of bearishness and record levels of "bear bets" could only mean that the sellers had exhausted all resources, hence any news that is not negative is good enough to cause a rally.

The low relative volume that has accompanied the double bottom and today's follow through move suggest to me that the bears have significant positions yet to be unwinded. When they will be spurred to unwind these bets is anyone's guess. The chart suggests that a gap-fill is a given, but I expect the Nasdaq to encounter serious resistance at 2500.

As noted on the chart, the Fibonacci lines have been uncanny in their ability to mark areas of support and resistance. I see no reason why they will not continue to do so. The 2433 area will likely provide support tomorrow should some profit-taking and shorting occur.

The fact that the Nasdaq has regained 2/3rds of its drop from the previous 52 week high and successfully followed-through does not mean that traders should let down their guards. There are still significant questions as to the strength of the economy, the sub-prime debacle is still in its infancy, and inflationary risks are still a threat. The amount of short sales and puts left in the market may be enough to push the Nasdaq to new highs sooner than most expect, but the trepidation that exists regarding the economic front may just provide enough of a braking effect to preclude the market from getting ahead of itself. Ultimately it will be better for the bulls if they can avoid creating an overbought situation over the next few weeks.


Ragin' Cajun said...

Great post! I love your analysis. The Fib. lines are unbelievable! How do you plot the Fib. lines? is there an option to do this? I'm new at T&A

Woodshedder said...

Yes there is an option, from the "annotate" window of stockcharts, choose the fib. tool from the toolbar on the top.

Ragin' Cajun said...
This comment has been removed by the author.
Ragin' Cajun said...

How do you know where to place them

Woodshedder said...

If you are looking at a long uptrend, and want to use the Fib. lines to guage retracement areas, start at the lowest low directly before the move starts, and then put the second line at the high. As the stock starts to retrace, you can get some ideas of where it might bounce.

If the correction has already happened, then you know your highs and lows (just like the chart I used) and then the lines can be used to guage areas of support and resistance for the trip back up.

There are more uses and probably better explanations to be found by googling Fibonacci.

Ragin' Cajun said...

Thanks Wood! Good Stuff! You are helping this college kid become a better investor! Much appreciated!

Woodshedder said...

No problem man. If I would have started trading in college, I'd be retired now, or at least I'd be trading for my entire income.