Near Term Outlook for NASDAQ 100 – Perception Is Not Always Reality and Much Ado About Nothing!

Capitulation is a wonder to see in action.  Thursday’s trade was just this side of “ like incredibly awesome dude.”  The DJIA and S&P 500 are less than ½ percent from new highs and just may get pushed there in after-hours trading.  The Russell 2000 also bettered its own high by a couple of points and is likely to better today’s high at 1033.34.  The NASDAQ 100 was up just shy of 2% and created a new “recovery” high at 3060.67.  Bonds put in a stellar effort of showing support with both the 30-year bond and 10-year note climbing over a point intraday.  However, the move itself remains what is commonly known as a “dead cat bounce.”  Precious Metals took their cue from gold scoring solid gains across the board.  The dollar was across the board sold with the Euro doing a kiss and run of the 1.32 level, but still managing to remain well above 1.30 during the U.S. session. 

The credit was generally slated towards Bernanke’s remarks yesterday.  Did I miss something?   I didn’t hear anything new or more pronounced then what was disclosed in May when all the markets took a header into the shallow end on Bernanke’s last FED remarks.   The statement “perception isn’t always reality” seems appropriate and I’m grateful that “irrational exuberance” or “Houston We Have a Problem” haven’t been resurrected.  Irrational at times yes, but exuberance has been replaced with capitulation.  On low volumes no less!  

The smorgasbord or plethora of opportunities for day trading should continue.   Don’t forget about position sizing.  The use of this remains critical in maintaining a positive P/L.    

NASDAQ 100

Elliott Wave Update (click chart to enlarge)

The NASDAQ 100 is one of the few indexes that is not likely to move to new highs above the 4816 high from March 2000.  On an Elliott basis the NASDAQ 100 is best viewed as tracing out a Cycle degree A-B-C counter trend rally to complete the larger recovery advance off of the October 2002 low at 795. 

The chart above includes Fibonacci resistance points.  Next resistance (stronger) is at the 61.8% retracement level of 3280 – well within spitting distance – beyond 3280 opens up the potential for a “blow-off” to the 3950 area. 

The chart below shows the current Elliott Wave count:

Within the A-B-C countertrend advance the NDX is within the 2^nd half of wave C.  This is different in that new highs are expected from the DJIA, S&P 500 and additional new highs from the Russell 2000.  The NDX will have retraced between 62% and 76% of the 85% decline that completed in 2002. 

Near term the NDX looks to be completing wave 3 of C setting the stage for a 4^th wave correction.  For the Elliott Wave geeks out there here is my current count:

Finishing, -5 of V of 3 of C

Cycle waves A and B are complete.  Cycle wave C began in October 2008 and will consist of 5 waves of which wave 3 of C being nearly complete.   The resolution will be a 4^th wave correction (down) and 5^th wave advance to finish C.   

The mid to near-term rallies have successfully pushed past 50% resistance at the 2805 and are sitting just below next resistance at 3280.  A solid push through this level should clear the path for the rally to extend to next resistance at 3955.  A full out blast higher can’t be ruled out with a jump to topside near term resistance.  

The longer-term picture remains bullish for the NASDAQ 100 as the pattern in progress moves to completion.  Corrections may be short in duration with the rally jumping into action quickly.  Also, as I have discussed previously I fully expect the NDX to reach new recovery highs on negative input. 

I can’t apologize for sounding like a broken record because of the importance of accepting that the status quo is changing please don’t be fooled in to complacency.  Now is the time to keep alert as the trading opportunities will be numerous and present themselves in both directions. 

But it remains a time when things can seem to change quickly coming as “surprises” to the markets when in fact the recovery advance has been in the “making” for over ten years.

It is a time when understanding the underlying reasons for the advances – the huge influx of money into the system by the global Central Banks – will eventually come full circle via the credit/debt – interest rate bubble bursting with such force that the equity markets will not be able to lean on the Central Banks good faith and credit to fix the problems.  It is a matter of when not if. 

From Monday’s blog and is still valid:

The longer-term charts are signaling new highs for the broader indexes before another correction kicks in.   The Russell 2000 pushed into that territory today and is seeing what is I loving call – the “TBTF long-term hooking” of the growing number of “yield seekers” aka retiring Baby Boomers.  To continue the rally, the TBTF analysts must

• Be convincing in their recommendation to buy on the improving economy,
• Prevent Interest Rates from continuing to spike higher,
• In fact they need to spike back down to “jump start” the next avalanche of buy orders. 
• Complacency levels must be restored as measured by implied volatility.  The result would be the VIX moving back (well) below 15. 
• Any notice of a change in the Status Quo must be squelched. 
• Keep an eye on the Employment Numbers –
  • If the rate declines moderately to strongly within the states of New Jersey, Michigan, Illinois, North Carolina, Georgia, Kentucky, Tennessee. Mississippi, or Nevada it could pull the national level closer to Bernanke’s trigger point.
  • If California, Florida, Pennsylvania, and New York continue to improve same scenario.
  • Full employment is (I’m sorry to say) not desirable since it usually ushers in higher inflation with it.  Therefore it is important for the TBTF and others to keep the risk “off” of higher interest rates – to keep alive the “carry trade.”
  • Lastly, take a look at the chart below (from www.zerohedge.com) and check out who would have motive to keep the rally going via holding interest rates lower!

While some position trading will be highly profitable – I am continuing to find ample opportunities in day trading.  Depending on your objectives a combination of day and position trading could prove very rewarding as the current patterns unfold.

Diversified Trading System

I continue to recommend as the best trading platform available to a broader range of traders from novice to expert.  The Diversified Trading System offers a cost effective product that allows a trader to enter into the “chaos” and trade more effectively.  

Trade Manager from Indicator Warehouse automatically calculates the correct amount of contracts or shares based on your account size or market volatility.  Automated stop-loss management and position sizing eliminates most of the problems most individual traders have.  Day trading and position trading both require (actually demand) good risk management.  Trade Manager does the job across the board and is an essential trading tool that ensures that you take the maximum profit from all your trades. 

A newer member of the money management tools available from Indicator Warehouse is the Profit Finder – System Back Tester.   When implemented it allows the user to:

• Immediately know the impact of parameter changes. 
• Automatically reads all of your DTS entries and exits
• Calculates the profit/loss of each trade
• Performs a wide number of essential intelligence boosting calculations instantly
• Provides solid details about the effectiveness of your trading strategy/ methodology/ indicators

The last two points above are valuable tools to use.  It will show you where some “tweaking” is needed to improve results through the back testing feature. 

My point on money rotation and sector rotation is similar to that on parabolic moves that they happen with frequency within many time frames.  As traders these types of moves can be a bonus for day trading or position trading so again don’t get caught up in the “what’s the catch.”    Realizing a rotation is occurring within a stock you trade or a sector is a great source of stocks to plug into the Diversified Trading System.  Allowing DTS to cleanly and beautifully capture the moves though any or all three DTS trading platforms.  Our goal remains to assist traders to make greater profits during all types of markets.  Sector and money rotation is another tool.

The Diversified Trading System used together with Trade Manager should continue to produce numerous trading signals in the DJIA, YM (mini), S&P 500, ES (mini), RUT, TF (Russell 2000 mini), AAPL, AMZN, GOOG, NFLX, and LNKD, GS, and Tesla Motors (TSLA).    

Here is an updated list of the markets where I have found that DTS (all three birds) are producing numerous signals:

• DJIA future (e-mini available) – highly recommended
• S&P-500 future (e-mini available) – highly recommended
• Russell 2000 future (e-mini available) – highly recommended
• NASDAQ 100 future (e-mini available) very highly recommended
• US$/Euro futures (e-mini available) – very highly recommended
• GS (Goldman Sachs) – good two way volume –
• AAPL (Apple Computer) – highly recommended
• GOOG (Google) – highly recommended
• LNKD (LinkedIn) – solid intraday range
• NFLX (Netflix) – solid intraday range
• TSLA (Tesla Motors) – highly recommended  
• 30-yr Treasury Bond future – highly recommended
• 10-yr Treasury Note future – solid two way trade
• TLT (Treasury Bond Long ETF) – very active
• TBT (Treasury Bond Short ETF) – very active (moves inversely to TLT)
• Gold (futures and ETF – GLD) very active – not suitable for all traders
• Silver (futures and ETF – SLV) – very active – not suitable for all traders