For Friday, August 16, 2002
Stocks: Market Consolidates Near Recovery HighsAfter the big surge higher Wednesday, the market spent Thursday trying to find direction, consolidating sideways in what is likely a next-to-last wave sideways before a short term rally into a top. The market has certainly shown the fabled tendency of cats: that is, it seems to have nine lives. Each time it looks like the herky-jerky rally is done for, it pulls another life out of the hat and frustrates the bears with a rousing jump. There are substantial resistance areas directly overhead, though (for details, see our Trading Page comments and the quarter-hourly S&P 500, NASDAQ-100 and Dow Industrials charts for Fibonacci resistance areas).
But, those lives may be running out for this cat. The current leg up is very likely the final one. We've been approaching this market on a day-trading basis lately while preserving longer term investment cash for a time when the market appears likely to trend. So far, that has been the best way to navigate the twists and turns. The surge in our sentiment gauges well into the overly-bullish category Thursday is a strong warning signal that the market is getting deliriously happy (OEX players bet $3.04 that the market would continue rallying for every dollar they bet it wouldn't, while the QQQ traders went hog-wild, betting $9.34 on the continuance of the rally for each dollar bet on the downside). There's nothing wrong with being happy, of course, but this level of bullishness is downright giddy.
We will be looking for the market to form another short term top over the next couple of trading days. If, on the next selloff, players continue to prefer calls to puts, we'll have a strong sign that the bear market rally is over and that we're on our way to plumb the depths again. Until then, we'll continue to look for intraday trades and, in general, move to the sidelines by the close.
For Friday, it appears we could see just a bit more rally, then a move down to test the bottom of the trading range. We're now extremely overbought on this bear market rally and a big move to the downside appears to be very close in time. In any case, the risk greatly outweighs the potential rewards, except for short term trades. You can follow our intraday trading comments on the Trading Page, linked from your MyClues Page.