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  • Rev Shark:

    Market Ready to Move -- One Way or Another
    6/13/05 8:12 AM ET

    "To be prepared against surprise is to be trained. To be prepared for surprise is to be educated."

    -- James Carse

    The stock market is setting up to deliver a major surprise very soon. We have been basing for about two weeks now, and the major indices are either sitting up a bullish cup-and-handle pattern or a bearish double top. Which is it going to be? It depends on who you are talking with.

    The bears have been extremely stubborn during this rally, and they are convinced that we are going to roll over and go straight down. This rally started from one of the most negative and gloomiest environments we have had in a long time. The sentiment polls are now starting to reflect more optimism, but there has been an unusually large contingent of bears who are convinced that all this rally has done is set us up for a greater level of pain.

    These bears are looking for the double-top pattern to play out. They simply can't believe that investors will continue to embrace this market while the long litany of problems exists, including inflation, a persistent Fed, mediocre growth, high oil prices and so on. The recent rally is much stronger than many of the bears expected, but they are ready to load up on the short side if the market looks like it is cracking.

    The bullish scenario for the market is a cup-and-handle pattern. The Nasdaq is a particularly good illustration. It formed a cup starting from the 2100 level in early March and then hit that level again on June 2. Since June 2 it has pulled back gently and is arguably forming a handle.

    A handle is a pullback from recent highs that shakes out the short-termers and weak holders. The key is that the handle not fall too far and turn into a double top. The buy point is 2100, when the right and left rims of the cup are taken out, ideally on increased volume.

    I'm leaning toward the cup-and-handle pattern playing out for a couple of reasons. The foremost reason is that too many folks did not participate as much as they would have liked in the rally from the lows of April. A lot of folks need some good performance to catch up. They are going to be inclined to buy the dips. If they generate even a little upside momentum, the hot-money traders and performance chasers are going to be buying aggressively.

    The market hasn't done much for the last couple weeks, and that really is the sort of consolidation and profit-taking that we needed to help set up another move higher. The wild optimism has been tempered a little bit, and worry has been restored to a small degree. We'll see how it goes, but I'm optimistic that the Nasdaq will complete the cup-and-handle pattern and break above the 2100 area.

    The media are all over the news this morning that Morgan Stanley (MWD:NYSE) has fired its CEO. My opinion is, "Who cares?" It might be interesting gossip if you are employed on Wall Street, and it gives the talking heads something to make a fuss about, but it has no impact on the broader market.

    Early indications are slightly weak. Overseas markets are mixed. Oil and gold are trading down a little, and we don't have much market-moving news to consider.

    No positions in stocks mentioned.

    Gary B. Smith:

  • Gapping Up

    News Movers: DFIB +33% (expands its multi-year strategic distribution agreements with GE Healthcare), EMRG +28% (news of possible Mad Cow case in U.S.), TASR +6.8% ($1.4 military order), MWD +4.9% (mkt applauds planned departure of CEO), SIRI +2.3% (to increase programming capacity)... Mad Cow Movers: EMRG +28%, VITX +8%, DOC +6.7%

    Gapping Down

    CNCT -20% (guides below consensus on FDA Non-Approvable Letter), NWAC -8% (Northwest may be heading for Ch11 -- WSJ), ELN -7% (Possible fifth Tysabri case is reported), RMBS -4% (Samsung sues company), BLUD -2.7% (Baird downgrade), BEAS -2% (Bear Stearns downgrade), BIIB -1.1% (see ELN).
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