Over the weekend I wrote that the market was in a position to stage a short-term bounce or at least shuffle around a bit as it tests the August lows, and the week started off with a nice three-day rally attempt that ended today at the 50-day moving average for the NASDAQ Composite Index, shown below on a daily chart. As the market works its way through the volatile “Chop Zone” it has formed since the August lows, the argument for a bear flag consolidaton of the prior breakdown off the peak in early August remains in force. The week got off to a rousing start with a big move to the upside, and yesterday’s almost ridiculous gap-and-run move right into and above the 50-day moving average reversed and churned, closing below the 50-day moving average on the heaviest volume in the rally over the prior three days. In my view, index maneuvers like you saw yesterday show that institutional selling is at work and will continue to be at work here as the big money distributes stock in anticipation of further lows. That’s how it looks from my vantage point. Whether some form of in-your-face QE gets announced by the Fed and sparks a continued upside drift is always a question, but for now I believe one can remain short the indexes using inverse Index ETFs per my September 17th report of two weekends ago.
The weak keep getting weaker in this market, rally or not, and former leader Netflix, Inc. (NFLX) is being shown no mercy as sellers have held it flat on its back over the past six days since it streaked lower after breaking out to the downside through the descending neckline of its previous Head & Shoulders top formation. Turn this chart upside-down and hold it up in a mirror and you will see what looks like a very high, tight, six-day flag formation on the daily chart, below. I wrote over the weekend that NFLX is showing little more than a “dead cat splat” since it stopped going down six days ago, and another move to lower lows looks to be in the offing. With the 10-day moving average coming down very quickly to meet up with the stock, I would consider shorting NFLX here with a maximum stop at the 10-day moving average at 137.14. As well, if I’m short a position in the stock from much further above, I would look for the 10-day or the 20-day moving average to provide upside guides for trailing stops in the event that NFLX does bounce, which could always occur if there is chatter about someone buying out NFLX.
Frankly, I think if anyone is interested in buying NFLX they should wait a while – the stock will likely get chaper. And the same might be true for some of these Chinese internets like Sina Corp. (SINA), shown below on a daily chart. Over the weekend I told you to watch for a rally up into the top of the gap-down day of what is now five days ago and which also coincides with the area of congestion in the pattern from mid-August that would constitute some overhead resistance. If you were brave enough to get short SINA on the rally right up into 90 resistance, and were not psyched out by the market’s low-volume rally right up into the 50-day moving average on the NASDAQ, then your downside target is initially going to be the 76.48 lows of three days ago when the stock staged an “undercut & rally” around the mid-June low at 82.25. With SINA having already undercut that low, the 76.48 low comes into play, and that is your initial downside profit objective, maintaining your upside stop somewhere around the 90 price level and hopefully at least no more than 3-5% above your initial entry point. At this point this is a simple trade if you are already short – run it to the downside price objective, or run it to the stop, there is nothing else to think.
In addition to discussing what to do with a rally in SINA, over the weekend (September 25th report) I also discussed watching for a similar rally in the biggest Chinese internet leader, Baidu, Inc. (BIDU), which we’ve been following as a short-sale target over the past couple of weeks. BIDU rallied with the market right up into its 200-day moving average yesterday, and this was the perfect short-sale lay-up as one could have hit the stock on the short side right at the 200-day moving average, minimizing risk with a very tight stop. Today the stock opened up just slighty with the market opening up right at the bell before rolling over along with the market. While SINA, above, picked up some heavier selling volume, BIDU’s volume was lighter today, but that could easily change tomorrow with sellers reacting to today’s move. BIDU has not yet undercut its mid-June low at 114.14, missing it by 16 cents three days ago as it tested that low before rallying right into the 200-day line. For now that would be my downside price objective if I’m short from around the 200-day moving average, watching to see how it acts if and when it gets there.
I continue to keep a close eye on Apple, Inc. (AAPL) as I consider it the “key” to this market and whether we will see a new leg down. AAPL is doing something quite similar to what it did in late 2007, after the market had topped in October 2007. AAPL continued higher going into the end of December 2007 when it broke out of a short cup-with-hande type formation and then cleared the 200 “Century Mark” price level and failed, invoking the Livermore Century Mark rule on the short side instead of the long side. In 2011 we see that AAPL, shown below on a daily chart, has continued higher even after the market topped out in late April/early May of this year. With AAPL tottering about the 400 “Century Mark” price level, a failure here could be similar to its failure at the 200 price level in 2007 – it could occur as the general market begins a new leg down as it did in January 2008. Today the general market is in a similar positoin to where it was in December 2007 as it forms a bear flag after a prior break off the peak just as it did back in 2007. AAPL tried to move higher yesterday and today, but without any volume to push it higher, sunk back into the red both days. Coming on the heels of the high-voume gapdown of five days ago, it may spell trouble for this recent breakout.
Below are daily charts of Apple, Inc. 2007 (AAPL) and the NASDAQ from 2007 going into 2008, roughly lined up with one another, so you can study the synchronous and non-synchronous moves in both during that critical market top.
NASDAQ 2007 TOP