Market Analysis for Apr 16th, 2004

Working Off an Oversold Condition
By Mike Paulenoff,

This is one of those days where it's a tale of two different markets. The Nasdaq is feeling the impact of Sun Microsystems (SUNW) and Siebel (SEB), among others, because earnings and guidance and Internet technology spending seem to be, in certain cases, a disappointment. There are companies that are showing robust growth but are not all that confident in telling investors that the next quarter or two will be as good.

So the Nasdaq felt the impact of the lack of confidence in future technology earnings late yesterday when the E-mini June Nasdaq plunged at the end of the day from about 1460 to 1445. Into that decline our hourly momentum gauges were telling us not to get too bearish at that point. Overnight, the oversold condition, which registered on our momentum gauges, kicked in, and by the time we woke up this morning the index was rallying a bit and in fact had gotten up to about 1460.

That was before consumer confidence came out, which was a major disappointment. It was 93 versus last month's 96. That took the wind out of the Nasdaq sector again and it plunged to another new low, this time at 1442. That's 2 points above the 1440 level, which presents the exact 50% pullback level of the March-April rally. So, as long as the 1440 level held in conjunction with the oversold and non-confirming momentum gauges, our work suggested that anybody short down around under 1450 was pushing his or her luck.

Sure enough, after the whipsaw this morning after the confidence figures came out, the market took off and rallied to as high as 1462 in the mid part of the session.

Right now we've come down to 1454 in what our work is telling us is a rally and a pullback that is part of a recovery period. It may only be a rest period, but perhaps more of a rally is coming within the rest period that gets you to a maximum of 1470 prior to what our work is telling us should be the resumption of the dominant trend that takes the index below 1440 to the 1400 area thereafter.

So, in a nutshell right now the market is working off an oversold condition and our work is telling us it has not completed that process yet, but when it does the market will turn tail in a serious way and head further down.

While the E-mini Nasdaq was plunging to new lows this morning, the E-mini S&P held like a rock in and around the 1127-25 area after making its low yesterday, Thursday, at 1119. Our work suggested late yesterday that the countertrend rally was coming somewhere in the 1134-36 area, and sure enough the rally peaked this afternoon at a high of 1136.

Our work is telling us this is the first leg of a countertrend rally that has peaked. I think there might be some more left, maybe you pullback to 1130-28 first, then you go up to 1137-39 to complete the countertrend rally, and then the market should roll over once again and head down.

A break below 1125 will confirm the bears are back in control. But we are looking for serious momentum non-confirmation of strength up above 1136 should that occur Monday or Tuesday.

Over in the QQQs, the Qs mimic the E-mini Nasdaq, so what you had was a secondary plunge to the downside this morning after the confidence figures came out that took the Qs down to 35.79. That made a new low for the decline that started in early April at 37.50.

But once again momentum figures did not support that. The oversold condition suggested also that was a bear trap, and sure enough they turned around and rallied back to the 36.32 area. The question is, is the rally complete?

Our work is telling us that the pullback we're having now toward 36 is an intervening rest before one more surge that will attempt to get to the 36.40-.50 area. If that proves to be the case then somewhere in the 36.40-.50 area the Qs will peak and reverse to the downside to resume the dominant downtrend that's been in force since early April. The next downside target would be 35.30-.20.

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