17th May 2010…
Believe it or not, selling appears to have been somewhat overdone during Friday last week, and the odds strongly favour the upside this week! Last week the Nasdaq index closed at 2346 while staying within the overall technical up trend:
We believe there will be a test of the 2500 level soon, in fact this rally is expected to start by Tuesday 18th May at the latest. Of course, no one knows for sure, but everything on the fundamental and technical picture on the US markets, shows that the underlying direction is up, and any dips in the markets should be bought.
Among particular interest in the US stock markets are the financial and semiconductor sector indices, they are at important key resistance levels, a breach of which is imminent. Looking at many stocks across the board and at many indicators, we don’t believe that this market can trade much lower. If it does open lower on Monday it will prove to be a trap for bear market traders.
You may well hear all sorts of stories when the markets are down, stories about troubled Europe, (GS), and all this nonsense. The fact is that the US economy is growing and business activity is expanding while the Dow Jones index is still below 11,000. This cannot possibly fuel a sustained down trend, and last week’s evidence suggests that these markets will head higher very soon.
The key to buying high upside potential stocks is to identify stocks that have been lagging behind, or stocks that just for other reasons still maintain a wide margin for upside movement.
If the rally does happen sooner rather than later, there are many stocks out there that could be considered, stocks like American Semiconductor Corp (NASDAQ:AMSC). These stocks are in their own recovery phase, and being just below their 200 day moving average, the most likely scenario is that once above $33, (AMSC) will not look back:
Many of these stocks had a surge in their implied volatilities making Call options more expensive than they were 10 days ago. However, one can still trade the expected rally using deeper ITM Call options, or just by buying Call options on stocks with the smallest surge in their implied volatility.
Another stock that is expected to trade very similar to (AMSC) is Qualcomm (NASDAQ:QCOM), its stock chart appears slightly weaker than that of (AMSC), nonetheless the stock is highly correlated to the rest of the market and is expected to end its recent underperformance on an improvement of its fundamentals.
Have a great week of stock market investing
Scotty Smith
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