Follow the Trend It Always Knows

Apple missed estimates despite all the fanfare the stock still only dipped 1.2% in after hours trading. Amazon missed bad and dropped a quick 10%, but ended after hours down only 2.1%. Microsoft released Windows 8 without much in terms of fanfare or gains in the stock price. The question relative to this data is the NASDAQ 100 index. How will the index fair in trading today? The close at 2657 was on the 200 day moving average, support? Do we move lower on earnings or do the buyers step in and hold support? The test lower done for now and a bounce in tap? The NASDAQ 100 is one of our sectors to watch on the day. A break lower will embolden the short interest in the index, but a bounce may bring the buyers back to the table to take advantage of the oversold technical indicator for the index.

Nothing has been resolved in relationship with the current break of support on the major indexes. The S&P 500 index has been holding between 1400 and 1420. The activity the last two days has been like watching paint dry. Still looking for some resolution on the direction near term. The NASDAQ index is holding 2975 and the 200 day moving average as support. 3006 is resistance and it is decision time for the major index. We have built our watch list on the downside and we wait patiently for the plays to unfold.

That said, the technicians are discussing the oversold conditions in several of the major indexes, not the least of which is the NASDAQ. The Technology index has been the catalyst on the downside for the broad index, and based on earnings that is not likely to change anytime soon. Below is a chart of the index and the downtrend off the September high has been consistent with lower highs and lower lows, thus establishing the downtrend. The move from the high at 3195 to the current close at 2986 is a drop of 6.5%. This is well within the definition of a pullback or test of the uptrend. However, the break of the trendline at 3035 would have to answered if we are still within the parameters of a pullback in the short term uptrend. Regardless, the question at hand is, do investors see the current drop as a buying opportunity looking forward? That would assume that the economic data, earnings, growth and global optimism are turning? I am not seeing that to be true. I am in the camp of the markets can remain oversold longer than investors can remain solvent. In other words, overbought is a signal based on data. Investors may not buy into the data and thus, the markets head lower. My belabored point is… don’t assume anything! Let the trend define the trade and trust what you see and know to be true, versus what you want to be true.

Today promises to offer more answer to these questions or at least paint a clearer picture. Why? It will give us more of data and another bar on the chart relative to support and resistance. My point, take it one day at a time and let this all play out accordingly. As investors it is easy to want and predict the outcome versus let the outcome happen. We believe if we can get in front of the outcome, and on the right side of a trade we will be richer or smarter than the rest. The reality is the smarter play is to let it happen and avoid the train wreck that may occur if you are wrong. Investing is as much about patience as it is about being right.