Bears Snatch Defeat From Jaws of Victory

We have stated rather firmly over the past few days our distrust of the recent S&P breakout. Breadth was our first clue since a decreasing number of stocks participated in the breakout. In addition, the glaring fact that tech did not participate as the QQQQ lagged back at support, provided plenty of reason to be distrustful of any stock rallies from the current level. Finally, volume never confirmed. Now as you can see the breakout is in serious jeopardy of failure as the SPY rolled over on heavy volume yesterday. Now let's take a look at the Nasdaq 100. The QQQQ has been ranging between $40.50 and $42.00 for six weeks now. Yesterday a weak attempt to take out $42.00 was strongly rejected and the index reversed on heavy volume. Also note the uptrend line, now at $41.00 is in serious jeopardy of failure. It is pretty clear that we have an intermediate top in this market and it is fairly clear that we are gearing up for a correction. Keep in mind that there is no reason to panic here. The sky isn't falling and the end of civilization as we know it is not in the cards. A correction can play out in many forms and we have plenty of warning here to prepare our portfolios to handle one should it come. Our course of action is also pretty clear and at the time of this writing we can see one of two scenarios playing out: 1. Yesterday's distribution day will find some relief and prices will once again bounce weakly. If we get such a bounce it should be used as a shorting opportunity. 2. MSFT's after hours announcement will quell any relief rally and the indices will break down over the next day or two. Under this scenario it will be necessary to short weakness. Today we wait to see which scenario plays out.