Market recoveries often feature a re-testing of previous lows, followed by dramatic turnarounds. And while this can cause indigestion for some, plenty of traders are aggressively using this to their advantage.
On Oct. 10, the Dow Jones Industrial Average hit 7882.51, establishing a five-year intraday low for the index, then bounced to close at 8451. On Oct. 27, the index hit its five-year closing low of 8175.77, only to jump more than 600 points in the next session. Thursday, outlook warnings from Wal-Mart Stores Inc. and Intel Corp. pushed the Dow once again below that key 8000 level, before stocks rallied.
All told, from intraday bottom to closing top, the market tacked on more than 900 points on the session, with that 8000 hit from the Dow being the catalyst.
Barry Ritholtz, chief executive of FusionIQ, wrote on his blog during the session that each of the major sell-offs eventually hits a point where the market becomes deeply oversold, causing a rally he expected to trade on. “We are buyers as markets approach those levels again,” he wrote. “The October 10th intraday lows remain our line in the sand as far as trading stops go.”
Other traders take it a step further, noting that during the early-morning declines, they kept buy orders on hold and waited for the market to hit 8000 before coming back in. Walter Prendergast, a portfolio manager for Paradigm Capital Management, said all levels of technical support can be important, but certain more psychological ones can hold more significance. He said the 8000-point area on the Dow is particularly noteworthy as it hits directly at how dire things have been in 2008.
“When the Dow goes into 8000, you’re looking at levels from the early part of this decade. Almost all the progress of 10 years is gone in 10 months,” Mr. Prendergast said. The last time the Dow closed below 8000 was March 31, 2003.
And while for many a push that low is further evidence to keep out of stocks, the vast majority of traders see that as a buying opportunity. When sentiment hits bottom, stocks typically find a bounce traders can ride for the short term.
Among the areas Thomas Lee of J.P. Morgan Chase highlights is 818.7 on the S&P 500, which marked an intraday low for the index in October. Mr. Lee notes that retests are an important part of any recovery but cautions investors that not every retest produces a bounce on the exact same support level — often, a new low is reached before a rebound occurs.
During Thursday’s move, the most buoyant names were some of the most heavily shorted areas going into the session: consumer cyclicals and energy stocks. It’s likely subsequent bounces will include moves from the names most hurt going into that brief time period.
Kevin Kruszenski, director of equity trading for KeyBanc Capital Markets, said a lot of the recent moves have nothing to do with fundamentals. As investors have flooded out of the market during October’s swoon and are yet to return, much of the action continues to be short-term moves and portfolio repositioning — as opposed to value-based buying.
And while he prefers focusing on broader indexes over the 30-strong Dow, Mr. Kruszenski said the 8000 mark has become a psychological level for many. “We are in a very technically driven market,” he said.
Source : http://blogs.wsj.com/
