A Time to Buy Is on the Market Horizon

Editor's Note: This column was originally published Tuesday on RealMoney -- on the eve of the big move in the market. For a free trial to RealMoney, click here. Or if you'd like to take a free look at Alan Farley's newsletter, click here.


We've seen neither the highs nor the lows for this year, and we're getting close to a major buying opportunity. It hasn't happened yet, but the ingredients are falling quickly into place. Traders and gurus are finally starting to chase the downside. This should increase public fear and trigger volatility index readings into the low 30s. That golden moment could give us the best reward-to-risk ratio since March 2003.


The indices are approaching their 200-day moving averages, another key ingredient for a sustainable low. I'd look for a period of testing those price levels before upside momentum comes back into play. Use caution and fade early buying surges that losers will use to get out of bad trades.

Line in the Sand
The indices are approaching an important test
Index Monday Close 200-Day EMA
Dow Industrials 10064 9873
S&P 500 1095 1062
Nasdaq 100 1381 1376
Nasdaq Composite 1910 1885
Phlx Semiconductor Index 459 466
Source: Alan Farley

I doubt we're looking at a V-style recovery, at least in the early phases of stabilization. However, buyers may trip over themselves to get back into the market once it becomes obvious that a sustainable low has been printed. This could trigger a rapid escalation back to the January highs.

Two upcoming events may affect this low's development. The first revolves around end-of-quarter window-dressing. It's hard to predict how this will affect trading, given that the major indices are all underwater for the quarter. We could see a "false dawn" scenario in which buyers bid up prices into April, only to vanish at the start of the new quarter.

More urgently, we have the April 2 release of the March employment report. I noted in a prior column that the market needs robust employment to sustain this bull market. The current bond rally tells us that many folks believe this growth cycle has already ended and is setting up for the next recession. I suspect this is nonsense, and bond bulls will be left holding the bag when numbers finally confirm the economy is recovering at a healthy pace.

A strong April employment report will improve market sentiment greatly. We could see an initial downtick after the release because of the potential impact on interest rates, but equity bulls will be encouraged by the report and return quickly. In a vacuum, an upside surprise in the March employment numbers could end this correction dead in its tracks.

But what about security issues? Perhaps we've forgotten the three-month rally that began just 10 days after the Sept. 11, 2001, attack. These issues do matter, but the media overplays the threat every chance it gets. The bottom line is that we've had scarier times than these in the last three years. This market can thrive and move to new highs, even though the evil-doers are still out there rattling swords.

Investors yield to worst-case scenarios right at market bottoms because they get brainwashed by media negativity. That's one reason why Barron's covers have been such good contrary indicators over the years. We should recall the classic political phrase of the early 1990s: It's the economy, stupid! It's not about the war, comparisons with the Nikkei or the plunge protection team.

I get crazy when talking heads tell us how the market's decline is unnatural and a terrible portent of the future. Get a clue! The markets rise and fall constantly. It doesn't take a mastermind to understand why we need a selloff to bring overheated equities back to reality. There's nothing odd or unusual about market corrections. They just hurt badly if you're losing money.

But Mr. Market doesn't care how you feel, especially during a correction. In fact, he's determined to get to the price that scares you the most. Why? Because that's where you'll decide you can't take it any more and finally throw in the towel.

Then the correction will end and the market will go up again. At least that's how it has worked the last million times or so we've been in this situation.

Unfortunately, investors have no right to a repeat performance of the 50% to 100% gains we saw last year. Accept the fact you paid too much for all that stock you bought at the January high, and the market now has a target on your back. Don't get mad or upset. That's just the way things work.

Alan Farley is a professional trader and author of The Master Swing Trader. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. At the time of publication, Farley did not have any positions in any of the stocks mentioned in this article, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback and invites you to send it to Alan.Farley@TheStreet.com. Also, click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

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