As dispiriting as the sharp decline for NASDAQ was on Friday, we remain essentially at the same crossroads as earlier in the week, with equal probabilities of a move in any direction - maybe further declines back downwards in the wide trading range, an eventual advance upwards to a new and more sustainable level above the magical psychological 5000 level, or more narrow range trading.
There was no true economic or business fundamental to drive the sharpness of the decline on Friday. Sure, people have come up with all manner of excuses (it was Chinese officials!... it was Greece!). It may indeed have been the Bloomberg terminal outage, which can be very disruptive for trading, flying blind. There is also simply the possibility that one of the hedge funds kicked off a selling program that had the precisely desired effect - to confuse people into believing that they were about to miss out on an emerging trend reversal. We will see soon enough. There is a solid chance that that reversal was real and will continue, but there is equal probability that it was a one-shot, Hail-Mary, last-ditch attempt to derail NASDAQ from establishing a solid beachhead above the 5000 level. And the lazy (or lurching) up and down swings within the wide trading range are the default behavior anyway.
Sure, the earnings outlook is less than exciting, but not as bad as some are asserting. Still, traders do need to earn a living too, so they will make the best - or worst - of even limited news.
NASDAQ futures suggest a moderate bounce at the open, indicating that traders feel the sell-off was a little too much and a normal recovery bounce is in order. As always, futures and the opening move are not reliable indicators of the trend for the rest of the day. The big question is whether hedge funds decide to sell into the early rally and extend the sell-off from Friday, or whether they might decide to take advantage of over-extended shorts and do enough buying to kick-off a forced-buying short-covering short-squeeze rally and nudge NASDAQ back up closer to the 5000 level.
In any case, NASDAQ remains within its wide trading range, where volatility is the only certainty.
I'm still recovering from the financial shock of paying my taxes. It will probably take me a couple more weeks to fully get back to a full trading strategy. I did manage to buy a few stocks on the big dip on Friday and will continue buying dips for short-term (one to 3 weeks) trading gains, nominally 5%, as stocks recover from the typically irrational slamming of quality stocks that occurs so often on Wall Street.
-- Jack Krupansky