Market Analysis for Dec 9th, 2003

The whole day the market waited for the Fed's announcement, and as it turned out the Fed made exactly the same statement as it made in the prior couple of months -- that is, that for the foreseeable future the Fed funds will remain at 1%.

Going into the announcement, however, the indices early this morning made recovery highs from yesterday after their pivot reversals from about 1058 in the E-mini S&P to about 1073, and in the Nasdaq from 1398 , in the December E-mini to about 1425. It is interesting, though, that the pullback this afternoon ahead of the Fed announcement retraced about 50% of the rally in the E-mini S&P and about 80-85% of the rally in the Nasdaq. The Nasdaq clearly has been the laggard, or if you're looking at it from a bearish perspective, has been a leader on the downside, while the S&P has been much more resistant to downside pressure.

Having said that, after the Fed made its announcement the S&P tried to rally to 1070 and failed, came back to 1064 and change. Similarly, the E-mini Nasdaq rallied to about 1410, failed, and then broke down below yesterday's low of 1398 1/2 to a new low for this decline at 1396.

Our work suggests that a break of yesterday's low is considered bearish and that there is more where this came from. In fact, the E-mini Nasdaq is headed somewhere into the 1383-85 level because of the breakdown of yesterday's low.

The big problem here is that you have two very different chart patterns, one being the S&P, which is relatively buoyant, and the other being the Nasdaq, which is not.

So while my work is bearish on the Nasdaq, you have to be cautious because the S&P is not confirming the negativity. That means that the sell signals from the Nasdaq side should be used guardedly with relatively tight stops for anyone who is short the Nasdaq.

For instance, 1410 would be about as much as the Nasdaq could rally under this bearish scenario. If it goes above 1410 you will be seeing the S&P much higher than it currently is and probably towards the recovery high from last March at 1074.

The QQQs, trading similarly to the Nasdaq, broke down below yesterday's low of 34.78 to a new low today at 34.71. That, similar to the Nasdaq indices, is a bearish omen and should trigger additional weaknesses in the Nasdaq indices and in the QQQs.

The next downside target zone is 34.50 to 34.25. However, there should be caution because the S&P indices are not confirming the weakness. A rally above 35.35 for sure would be signal to be out of the Qs. A lower signal, though, it seems to me is that if the Qs rally above 35.07, that would be a preliminary signal that the Qs have executed a bear trap on the low side and are now headed back up.

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