Securities Research Services

Tuesday, May 16, 2006

A Bounce Is Likely, but be Careful

Put purchases continue to be extreme indicating that a near term floor is likely in place. Yesterday the QQQQ found support at the neckline of a long term head and shoulders pattern and all major indices bounced as shorts booked their recent profits. Over the next couple of days we would expect to see the market move up in a countertrend rally as options sellers do their best to manipulate the market up to maximum pain levels hoping to make the contracts expire worthless. It is our opinion that this countertrend rally will not be tradable for anyone except those with the shortest of time frames. The path of least resistance for the near to intermediate terms is firmly down. It is our opinion that any countertrend rallies should merely be used to exit open long positions and to position into short trades. A lot of eager bulls will be ready to quickly step back into the market to regain recent losses. We believe that this will be a mistake. The strength of the recent sell off indicates that support levels we are now at will once again quickly come under attack. The best course of action at this time is to remain patient and to remain in cash while some of the oversold pressure is relieved. Recent selling is leading us to a very nice buying opportunity, but we are not there just yet.

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