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The Market - Where to From Here?

Wednesday's edition sparked lots of requests for a little more commentary on the market direction. Our team of crack technicians got together on Friday, read the tea leaves, and generated a chart which lays out three possible scenarios for the near term. 

After about nine months of courageous appreciation, healthy levels of fear have returned to the market. Recent geopolitical violence in Spain, Taiwan, and Gaza have sparked a significant sell off. The media is overlooking another important factor: this past week's accusations from former terrorism czar Richard Clarke has been extremely damaging to the Bush Administration. It comes from a very credible source, and cuts directly to the core of Bush's foundation argument for re-election. Odds are 50/50 at best Bush will be re-elected, and the market does not like the uncertainty. This is not a political comment, so don't send in emails with your political views. This newsletter is about the stock market.

This correction is heaven sent. As stocks moved up unabated, risk levels at higher entry points moved up in kind. I'm glad to see the bar being reset, giving investors another opportunity to board the speeding train. Fear provides the fuel for new highs. The market charges up when short sellers are being blown out of positions and put options are expiring worthless. 

In the last four months eight of the companies we featured have made multi year highs. That's an extraordinary number. If you feel you have missed the boat, or want to add to positions that are working out, now is your chance. I believe the next leg of the bull market will begin in mid April when 401ks are funded, 1st quarter earnings are announced, and tax day is behind us.

Toby Smith of Changewave calls this a "TNT" market. It's the "Terror and Turmoil" trade. The market is not selling off on huge volume. There is simply a buyer's strike, and the shorts are emboldened. Microcap investors seem to have it right. I have noticed falling prices, but on very light volume. This suggests shareholders are not selling. Light volume pullbacks lead to light volume rebounds.

Here's the NASDAQ chart we prepared. I believe the most likely and most bullish scenario is a second pullback to the horizontal blue line at about 1880. This level provided support three times between last October and the end of 2003, and would complete the "double bottom" market technicians love.

A break above the angular blue resistance line would also be bullish. I don't believe it will happen without a double bottom, but if and when it does look for the market to retest the old high shown by the red line at the top.

If the market heads south and pierces the blue line at 1880 convincingly, look for the next level of support at about 1780- the lowest blue line. The bottom red line is the lowest the market can trade and still be in an uptrend. If we break below that line, the Bear is back.

This information is most useful to traders. If you are a long term investor just accumulate your favorite stocks when they give you low risk entry points, and don't worry about where we are headed in the short term. 

There was a great snap back rally on Thursday. I liked the article I read in the Wall Street Journal entitled (paraphrased): "Stocks Rebound as Investors Turn Their Attention to Value".  Against the backdrop of projected operating earnings for the S&P 500 making a new all time high ($64.65 for the next 52wks), this headline makes a lot of sense.

It's gut check time. As you consider whether to buy, sell, or hold, check for the feeling in the pit of your stomach. When it seems easy, and stocks seem as if they have no where to go but up, risk levels are considerably higher. When you have that queasy feeling in your stomach and you're not quite sure if you're doing the right thing, you have arrived at the point in time where you are likely to make the most money. Fortune favors the bold.
 

HyperDynamics (OTC BB: HYPD) - Risk Profile Reduced Considerably

I've reported on HYPD a lot lately because there has been a lot to talk about. Not only has the stock been red hot as you can see from the chart, in addition the company has been delivering some exciting preliminary seismic results from its West African offshore oil concession.

HYPD made a nice run into the $2.25 range last November. It's surge to the upside was sabotaged when the company filed its September quarterly financial statement with the SEC. At that time, investors who had focused on the potential of the West African concession were surprised to learn the company was essentially broke, and the stock traded down to about $1.50.

I received emails from many shareholders questioning the wisdom of the idea. At the time the company did not have the capital to complete the seismic studies, thereby increasing the risk factor.

As a result of the news which came out on the company after the close on Friday, that component of the risk profile no longer exists. Congratulations to those who had the faith it would work out. For taking the risk when things looked bleak you have been rewarded with a double on your money in four months. This is what risk and microcap investing is all about. For our purposes, in cases like this, faith can be defined as "Belief in the Absence of Data".

On Friday, just after the close, HYPD announced it had raised over $5.5 million since the first of the year. Based on their current burn rate, this should give the company enough capital to provide for its needs for at least another year, and be more than adequate to complete the seismic studies and prepare to drill the first test wells.

The capital was raised through a private placement, and funded by accredited individual investors. The pricing was a little low as compared to the current market, but about normal as compared to the price of the stock when the documents were drawn at the end of last year. The company also disclosed the private placement had no registration rights. Therefore, participants will not be able to sell their shares in the open market until they are eligible to become free trading under Rule 144. This means each investor will have to wait one year from the day they put their capital at risk. By that time, HYPD will either be a huge win or a big disappointment.

The current chart provides a classic study in support/resistance. This is why I like this simple technical analysis. We measured the recent surge in the stock from bottom to top. Last week, in conjunction with the weak market, the stock provided a near perfect 50% retracement of its big gain, and began to rebound. It's peak of $3.75 was a high risk entry point. So far, the 50% retracement level of about $2.75 looks like a short term lower risk entry point.

In last weekend's edition I stated the stock was probably a sell for short term traders. Coupling the stock's bounce off the 50% retracement level with Friday's great news now makes the stock a buy for short term traders. For long term investors- just hang on and enjoy the ride. If the company strikes oil off the coast of West Africa, you'll probably make a lot of money. 

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