Great Trades

Great stock trades based on fundamentals and technical analysis.

Monday, May 22, 2006


Market Crash or Bounce?

After 8 straight Nasdaq down days for the first time since 9/11, and 9 straight lower lows on the Nasdaq 100 for the first time since 1982, the U.S. stock market is reaching extremely oversold short-term readings. I've heard some predicting a market crash like in 1987, and see a lot more worry about stocks than a week ago. With stock index futures deeply negative this morning, is this the time to be selling out of the stock market to avoid a crash?

While we at Great Trades don't like the overall stock market fundamentals, current seasonality (sell in May and go away), or long-term outlook here and have significantly reduced our overall market exposure in recent months, we expect a short-term rally from the current oversold levels to commence within the next few days, if not today. On today's weakness, we are temporarily increasing our overall market exposure via stock index futures, which we plan to sell to reduce our exposure again during the next rally. We don't recommend any readers use futures because of their huge leverage and high risk, but we do want to communicate our confidence that the market will rally in coming days, despite very negative sentiment and calls for a market crash.

One Nasdaq 100 trading strategy with a great track record triggered an oversold buy signal on May 11, with the Nasdaq 100 trading at 1657.48. Since then, there have been 6 straight lower lows on the Nasdaq 100, with potential for a 7th straight lower low today with another weak session. By itself, 6 straight lower lows on the Nasdaq 100 is a buy signal with a great track record (higher close 2-5 days later in 25 of 27 occurrences over the past decade). These 6 straight lower lows coming from an already short-term oversold level may be unprecedented, especially with no catastrophic event during the decline (even the 9/11/01 selloff had only 8 straight lower lows).

At the current short-term oversold condition of the market, with heavily negative market sentiment out there, we at Great Trades are going against the grain and calling for at least a short-term market rally to commence soon, likely within the next 2 days.

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Disclaimer: Great Trades may have a position in all or some of the stocks discussed in this blog, but is not paid by any company to promote their stock. Great Trades contains opinions, none of which constitute a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. Great Trades does not provide personalized investment advice.

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