ollie VELEZ institutional views and news

Discussion in 'Wall St. News' started by marketsurfer, Apr 30, 2009.

  1. from velez capital

    The popular belief in the market place is that the market is ‘over extended’ and has run into prior highs, so it cannot run any higher. While it is true that we may see a stall here, we need to take a closer look at these two items. The concept of being ‘extended’ is really a purely subjective term. It has different meanings to the fundamental and the technical trader. From a fundamental point of view, if the price of a stock doubles, so do the PE ratios, etc., so the thought is that if the fundamental numbers are twice what they were, the stock is twice as over valued as it was. There are many things wrong with that view, but suffice it to say, all that matters is how many people have bought the stock, compared to how many are still willing to buy it. That is the technical view. From a technical view, the only one that matters, the market is not over extended.

    We touched on that in the last letter. The bullish view from the last letter has played out, as we now have seven green weekly bars on the QQQQ and in most markets. Is it time to stall, because we are ‘extended’ and at a prior high (see ‘1’ on the QQQQ weekly chart below)?

    Notice what the market did to get to these highs. It traded above the area at ‘2’. This was a very difficult technical area. After a brief pause, it ran right through the area. This was NOT that long ago. This tells us something. The last time the bears had a chance to turn things around, they could not even slow the momentum. This tells us that the bulls are still in charge and have a lot of firepower. Notice also, that if we do successfully clear the area at ‘2’, we have no resistance above until ‘3’, which is by far the most important resistance area for the market. It is minor resistance, which in many cases, is the most powerful form of resistance. However, in this case, the resistance area is not all that significant, partly due to the fact that we just handled a tougher one recently. How about being ‘extended’?

    The funny thing is, being extended can work both ways. When markets move up without pulling back or stalling, it leaves a big group of people behind that want to join in, but have not been able to. It you look at the weekly chart above and the daily chart below, there are a couple more observations we can make.

    Notice that this was a very tight channel on the way up. No pullbacks for the ‘less aggressive’ trader to enter. The days down all came on gaps that fully recovered. This makes it difficult for people to jump on board. Notice also, that we measure ‘extension’ on a technical basis by looking at the ‘acceleration’ on a chart. That means that not only is price moving up, it is moving up faster and faster. This can often be viewed nicely by comparing the price to the 20 period moving average (20ma). Note that there has been no acceleration. When we see acceleration come in, and prices start to pull away, we know that the rest of the traders are now deciding to jump in, and when they exhaust their money, that is when the market will have its first pullback.

    The SPY is definitely weaker, and when you couple that with the fact that we are in a highly watched area, we will likely see choppy trading and a couple of down days. However, despite popular belief, we will likely continue the rally very soon. The key area will be the 32.00 area in the QQQQ. If that area is tested, and fails, then there is a greater likelihood we will come down lower. Until then the daily is in an uptrend, and as long as that lasts, stay bullish.