Thursday, May 25, 2006
An intermediate bottom should now be firmly in place. Yesterday marked the highest volume trading on the QQQQ and SPY in the history of those indices. Bearish sentiment readings prior to yesterday (a contrarian indicator) were at all time lows, and the VIX continued to spike higher. All of these readings spell "reversal." We have some theories about how this reversal will play out. We should be looking at a nice uptrend that will last over the next two weeks at least. The blue chip indices might even move back up to test their recent highs. However, we believe that sellers will be looking for another opportunity to short once this rally is played out. This we believe spells ongoing opportunity. Consider this. Sentiment readings and market volatility levels are spiking on the bearish side as we trade near a bottom of a corrective move. Once short covering sparks a rally back higher, we would expect that complacency levels will increase and bulls will once again become overly optimistic. A lower high on the Nasdaq at that point however would really take the wind out of their sails and a second frightening leg down should then follow. If it plays out according to our projections, we should see a very nice opportunity to make quick money going up, going down, and then subsequently will find that a serious long term buying opportunity has emerged. This is why we have embraced the breakout in the VIX as a very friendly development.