Friday, October 12, 2007

Equity Index Update (Special Edition)

Equity Index Update (Special Edition)SocialTwist Tell-a-Friend
Brad Sullivan

The index markets suffered through a sharp decline in the afternoon trade after a JP Morgan analyst cut revenue estimates for the Chinese Internet company BIDU (Baidu.com). The stock plunged from 358 per share to 303. Other staples of the momentum side also slid as GOOG dropped from a new all-time high of 641 to 622 on the close…AAPL fell sharply as did DRYS. The NQ market participants were clearly caught off guard as the index cratered from 2210 to 2160 in 30 minutes of trading…the subsequent bounce proved short lived and another round of selling pushed the index to the session lows of 2146 a solid -2% drop for the afternoon from high to low.



The interesting aspect of the decline was the second wave of selling. It was during this wave that the broader market came along for the ride on the downside…GS gave back its entire session from Tuesday’s FOMC minutes rally and the stock settled at 229. The examples of this type of price action were found everywhere by the close and one has to wonder if a confluence of forces that have been the underpinning of this rally (global growth, commodity boom, no inflation…so on so on) is being rethought. Certainly, a one day reversal should not cause a top in this long running bull market…and for the bears hoping that we have finally turned the cards over to the “sell” side of the ledger I would advise caution. There needs to be more technical work done on the downside in order to generate a price ceiling of significance. In the short run, it would appear that a rally back to yesterday’s highs would be a stretch. So…where does that leave us?

From a day trading perspective, much of the move was accomplished (at least in terms of velocity and price discovery) in yesterday’s swoon. The SPZ went BELOW the September Employment Report session low (1558.25) and some mild sell stops pushed the index to session lows of 1556.25. However, this low was still HIGHER than the GAP left from that very Employment report (1552.25). The subsequent short covering bounce into the close pushed the index towards 1565 – that close is on slightly lower on the week and does not represent the low close of the week as that was accomplished on Monday at 1562.75. In fact, only the NQ and ER2 contracts closed at new weekly lows. Essentially, this boils down to patience and a little bit of reality. Yes the markets are overextended and the fact that a revenue downgrade of a Chinese Internet company could put so much pressure on the marketplace proves that point. However, to make the leap from the trade in BIDU to an overall slowing of the China Story may be a bit of a stretch. In my opinion, we witnessed a rare news event that led to a bit of a buyers strike. Whether or not that continues today will be fascinating, particularly as we head into earnings season. My advice is to lay low and look for a few opportunities, particularly early, for selling rallies. Psychologically the market took a hit and some of that should carry into today.

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