Dow Jones 11239.28 +276.74 1:28 pm PDT, July 16, 2008 NASDAQ 2284.85 +69.14 For info, visit access.smallcapnetwork.com S & P 500 1245.36 +30.45 Change your subscription status here Russell 2000 686.74 +24.39 VOLUME 08 : ISSUE 63 Market Forecast: Buy Signals Given Like the heading said, we've got some buy signals in place. This isn't likely to surprise anyone, in light of our recent discussions about a likely bottom being made. However, we're going to be a little more specific today and tell you what we see panning out for a couple of indices.  First things first though. The reason we're willing to make any call is rooted in the bigger dynamic - the tide looks like it's changing, and that should have the same basic impact on all stocks.    The Bigger Picture If you read and agreed with Saturday's edition, I really hope you've been keeping tabs on the blog since then. If you had, you would already know that on Tuesday, we saw 1304 NYSE-listed stocks hit new lows. That's the most ever, at least according to my data source. On the surface it sounds bearish, but as I've pointed out recently, it's more likely a sign of capitulation. Today's rebound lends itself to the idea. The VIX also appears to have peaked, though you may have seen an unusually high open for the VIX today. It may have been a bad tick, but it was misleading. My data was corrected in the meantime, as you can see. Don't freak out of you see something different. All the other hints I looked at Saturday still apply as well. As for which indices to watch or even trade, take your pick. Theoretically they should all rise if our expectation is correct. However, you don't need me to tell you one index isn't the same as another. So... I believe there are two indices with a little extra room for upside movement - the Dow and the Russell 2000. The former I like because its severe beating has left it the most oversold, while I like the latter because small caps have been noticeably stronger than other stocks over the last few days (though they also have lots of room to bounce before resistance is hit again).   Where the Rubber Meets the Road The Dow took the hardest hit over the last couple of months, mostly because it's loaded with financial stocks. That's why I like it so much now - I think financials are due for some recovery.  The IndyMac news is out of the bag and priced in, and we've been assured Freddie and Fannie are going to be ok (even if they're ugly). And, the SEC is going to hopefully crack down on the rampant short selling of financial stocks. All of that relief will be temporary, but I think we'll get enough mileage out of it to justify a trade.  My near-term target for a Dow rally is 12,722. That's where the 200 day moving average line is now; notice how it was a problem area back in May. I think we also need to watch 12,866, which would be 61.8% retracement of the entire bear market's pullback. As for an uncle point, my mental stop is yesterday's low of 10.827. (On a side note, I think breaking 11,000 once was a key to any rebound.) Regarding the Russell 2000, it's pretty clear small caps stopped their bleeding about a week and a half ago, while the market didn't stop falling until yesterday (if it did indeed stop falling). We also saw the most strength from the Russell 2000 today.  I'd be amiss if I didn't also mention what looks like a triple-bottom for the Russell 2000 index - right around 650. From here, I think a move to 745 would be a reasonable expectation. That area was resistance a few weeks ago, but a floor a few months ago. There's just something about it. The 777 level would be a 61.8% retracement, though that one feels a little less meaningful. A stop at 650 - or slightly under it - makes sense to me. The one thing I don't like is jumping on after today's big move. We may not have much of a choice though. Just be smart in that regard.    What To Do, What To Do As for how to play it, you've got several choices. There's an exchange-trade fund (ETF) for all the major indices. The iShares company offers their Russell 2000 Index Fund (NYSE: IWM), while the DIAMONDS Trust (AMEX: DIA) mirrors the Dow Jones Industrial Average. The S&P 500 is represented by SPYders (AMEX: SPY), and you're certainly familiar with the NASDAQ 100's ETF ticker 'QQQQ'. All well and good. My only problem with an index ETF is leverage - you have none. The projections I offered above are only between 5% and 10% moves. That's not bad for a few weeks worth of work, but it's not huge. As an alternative, leveraged ETFs can move the same direction as the underlying index, but by up to twice as much. ProShares and Rydex have the most ETFs of this variety.  My personal weapon of choice is options. These can have even more leverage than leveraged ETFs. Yeah, there can be more risk, but the risk is also well defined. The coolest part about trading options is you have a universe of choices ...and therefore more control your risk. Deeper in the money and longer-term options have less risk, but less reward. Short-term and out of the money options have more reward, but more risk. You can choose to anywhere you want to on that risk/reward spectrum. Personally, my rule of thumb is to buy one more month of time than you think you'll actually need, and to go one more strike in the money than you feel like you want to. That doesn't make it right for you necessarily, but that's what I'll be doing. If you're not familiar with options but are willing to learn, there's no better place to start than the Chicago Board Options Exchange's (or CBOE) site. They've got everything.    We Value Your Feedback   Got comments, questions or suggestions? 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