More Downside to Come
Posted by Sean Hannon
January 17, 2008 at 8:23 am
    Acting in a contrarian fashion often yields positive results. When the market leans in one direction, there is little money left in that trade. For this reason, many technical analysts look to support lines and various other indicators to tell when a market has traveled too far in one direction. Hoping for a quick reversal, you can establish a mean reversion trade to enhance returns. Knowing this, now would seem an optimal time to begin buying stocks and preparing for the reversal. In the long-run this may work, but doing so now would be too early.
    Looking at a series of charts, it is clear to me that we are oversold, but not ready to bottom. Prior support levels have fallen, RSI is oversold, my timing model is oversold, yet we continue lower. This is one of those situations where we need to reach extremes before we rally. This past week I established fair value targets on the three major indices as follows - DJIA 11,700, S&P 500 1,285 and NASDAQ 2,000. Until we reach these extremes, I will not be a buyer. Once we do, I can pick up stocks cheaply and prepare for future outperformance.
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everyone everywhere has this outlook for the market. it is so obvious to everyone the market is going lower. i am bullish. the rally will start looking terrible and just keep going up.
the market has a declining wedge. start looking up
NASDAQ 2,000 interesting opinion Sean. I like the general synopsis though of playing smart and not taking any unnecessary risks by going long when you don’t know the bottom. Personally I think we are good for a 100+ point rally on the NASDAQ, just a matter of when…
Maybe it’s just me, but the term “cash is king” would hold true right now. However, if you are willing to take some risk, there are some serious gains to be made in this carnage as well.
So I have a total newbie question here…does this ‘oversold’ market make it a good time to snatch up stock to hold for long-term gains? Or is this some kind of downward trend?
Cody,
Short term technically this should be a good time to buy stocks at depressed levels and look for them to have quick bounces back to the upside. Holding them “long” though as in for months may not be the best idea, because yes we are in now a downward trend.
Your mentality is correct 100%, take advantage of an oversold market for some quick gains. The problem arises though when we ask, is this the bottom short term?