12/21/2008 7:52:02 PM
Welcome to the Advantage Report, this report summarizes the general market as well as the Nasdaq 100 and issues BUY or SELL signals when the conditions present themselves.
Both the SPX and NDX remain on full BUY signals. We've been long on the QQQQ's (Nasdaq 100 ETF) since November 5 and the SPY (S&P 500 ETF) since December 3.
Given the big news week we just had, the market behaved relatively tamely, I'm guessing that the Madoff saga probably put a lid on the move going higher for the time being.
Overall however, the momentum remains positive and while it's been an extraordinary year full of unbelievable events, the market seems to have bottomed for now and a happy new year could lie ahead.
Looking back, 2008 was a truly incredible year and I doubt if anyone could have predicted the speed and magnitude of the fall. To put things into perspective, the bear market that started in 2000 took 25 months to drop 50%, we did it in just under 13 months!
As a word of caution, we may not have seen the ultimate bottom yet and that's reflected in the VIX still being at historically high levels. In any event, we're not concerned about where the ultimate bottom lies, as long as we position ourselves appropriately in either direction, that'll be fine.
In the bigger picture, we're getting tantalizingly close to a medium term buy point, if the week ahead is strong, we could have the MACD finally cross. Most likely this will coincide with a break above 920.
As a side note, look at the setup in late March and the rally that ensued over the next 2 months. We could be heading for a similar scenario where the 200 DMA becomes the target at around 1160 - 1200 by March or so next year.
In the shorter term, the symmetrical triangle scenario discussed last week resolved to the upside after the Fed slashed rates on Tuesday. We even managed to close above the 50 DMA into Wednesday, although the next two days was back below the 50 DMA and the potential for a pullback to support at around 850 now exists.
Having said that the set up at this point remains quite positive as we now have an ascending triangle pattern, which is a bullish pattern. If we get above the 920-resistance point, then we should get to 1000 before meeting the next big resistance level.
Also supporting the bullish camp is the symmetry that's developed between Oct/Nov and late Nov/Dec, if this symmetry continues then the climb to the 1000 level into January is probable (even if we do pullback to 850 first).
For the week ahead, support on the SPX remains around 840 - 850 and resistance around 900 - 920.
The VIX Picture
The VIX confirmed the upbeat mood in the market by breaking below 50 and is now at the next support point of 45.
We now see that the VIX has had a double top and the momentum is down, this all bodes well for the market in the near term.
The VIX measures the premiums investors are willing to pay for option contracts and is essentially a measure of fear i.e. the higher the VIX, the higher the fear in the market place.
NDX Chart - Shorter Picture
The Nasdaq seems to have an almost perfect V shape bottom now and a break above 1250 should take us close to the 1400 level. Note, there is also an ascending triangle pattern developing as with the SPX that is also bullish.
The one proviso with this bullish argument is that we are still within the downtrend channel and from that perspective, there's still a symmetrical triangle and therefore indecision for now.
Ideally for things to remain on the bullish side, we'd like the mini uptrend line at around 1190 to hold this week and move higher. If 1190 breaks, then the 1160 region becomes a key level and this could be the case if the SPX dips to 850.
For next week, support on the NDX is around 1160 - 1190 and resistance is around 1230 - 1250.
Quote of the Week:
Two quotes I like for the year-end are:
"We will open the book. Its pages are blank. We are going to put words on them ourselves. The book is called Opportunity and its first chapter is New Year's Day." ~Edith Lovejoy Pierce, and;
"The object of a New Year is not that we should have a new year. It is that we should have a new soul and a new nose; new feet, a new backbone, new ears, and new eyes. Unless a particular man made New Year resolutions, he would make no resolutions. Unless a man starts afresh about things, he will certainly do nothing effective." ~ G.K. Chesterton.
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