The market giveth and the market taketh away. Much of last week's rally in the
Nasdaq Composite Index
was lost, then partially gained back. The market bled off 3982 on Monday to a low of 3592 on Wednesday then bounced to 3816 on Friday. We are smack dab in the middle of what I call a "mule market." That's right -- not bear, not bull, but a bonafide mule market. Understanding what type of market you are in is just as important as identifying the players in the market. Let me explain.
Prior to the recent crash in the Nasdaq, the primary players causing momentum were like wild race horses that moved in massive herds. When the fastest and strongest stallions turned and broke from the herd in a different direction, the rest of the horses (online traders) followed without hesitation. The slightest disturbance would set them off, causing them to dash from one direction to another. It was a beautiful thing.
The herd was following the strongest -- and what they perceived as the smartest -- horses. After all, for the past year the stallions had not been wrong, leading them into upward momentum at every turn, finding jewels like
. Nobody wanted to miss out on a good turn, or the potential for positive gains. These turns were so profitable, the elephants (institutions) tried to join the party and keep up with the horses. Institutions
to prove to their stockholders that they could produce comparable gains being made by the momentum players, or face losing them.
During the crash, many of the stallions and horses that followed were slaughtered in great numbers. In fact, many of the elephants were slaughtered right along with them, losing a great deal of their portfolios in a few short weeks. We simply will not know how many and to what extent until the institutions release their statistics later this year. Those that survived decided maybe this was a dangerous game and maybe the stallions were not so smart after all.
This turned our two groups, stallions and elephants, into a group of mules. Stubborn mules that are huddled together, waiting for someone to make the first move. Everybody wants to be first, but nobody wants to make the wrong move and get slaughtered again. It will take more than just a few wild stallions to get the herds in motion.
This is where I see us right now, and it's why the Nasdaq's volume has been so low lately. The online traders and the institutions are waiting for something to make them move. It's a Catch-22. Everybody wants to move, but the herd won't move until someone moves first. The catch is, nobody will move until the herd moves.
When this recovery happens (and I firmly believe it will), it will be led by a few brave institutions that simply can't ignore stocks that are perceived as incredibly undervalued. It will start with just a few, and as the momentum slowly climbs, so will the confidence within the market. At some point, online traders will feel comfortable that this is not just another false rally and join the party. Until then, it will be a slow and deliberate recovery, with very predictable waves and little volatility. This is what happens when institutions lead the market.
When the Nasdaq hits 4000, this will be a key indicator to online traders and will further fuel the fire, causing increased momentum and volatility that could push it up easily to 5000. Remember, everybody has been bit with the victory bug and wants to feel it again. Last year, they all jockeyed and moved retirement dates in their heads based on current gains extrapolated over 10 years. We all do it. I hear it all the time: "If I continue to make what I made last year, I could retire at 50 or 45." Since then, they have been kicked in the gut, and the dream was taken away. Now they want it back.
The players are not as confident as they once were. Thus, the tiniest noise causes concern, such as the employment figures released on Friday or the coming
meeting on May 16. These events are rattling unsteady nerves.
So, we are in a mule market, stubborn and hard to get moving. The recovery will be led by institutions, but it will be slower and more deliberate. In the end, it will produce a stronger market with greater gains overall. A volatile recovery is just another factor that plays on the anxiety of the nervous players.
As a momentum trader, even in a mule market, momentum can be found if you look in the right places. Last Wednesday, the Nasdaq dropped from the open at 3760 to 3590, then bounced in the last half hour, climbing 110 points to a little more than 3700. This increase in momentum and buying was a strong enough signal for me to identify three overnight gap plays.
In a previous column, "
The Secret to Holding Stocks Overnight," I discussed how I identify and buy stocks in the last few minutes of the market, hold them overnight and sell them prior to or at the bell the next day, looking for the stock to gap up higher than it closed the day before.
In the last half hour, I focused on three stocks:
Maxim Integrated Products
. I picked them because they all participated with the rally in the end and had some sort of good news and positive momentum attached to them.
Commerce One closed on May 3 at 55 11/16 and opened at 60 5/16 for a 4 1/2-point gap. Emulex closed at 58 and opened at 60 1/32 for a little over a 2-point gap. And Maxim closed at 64 1/8 and opened at 64 9/16 for small, 7/16-point gap.
Momentum is everywhere, even in a stubborn mule market! Now, if someone knows a way to jump-start that mule, we will be on our way to Nasdaq 4000.
Ken Wolff is founder and chief executive officer of Paradise, Calif.-based MTrader.com, a daytrading and swingtrading Web site. This column provides general information about momentum trading. TheStreet.com has no affiliation with MTrader.com, and no endorsement of MTrader.com or momentum trading is intended. While Wolff cannot provide investment advice or recommendations here, he invites your feedback at