Monday, May 29, 2006
Last week the market bounced off a vastly oversold condition. Breadth was great as nearly everything but the semi conductors went along for the ride. Problematic was the lack of volume on the move. After Wednesday's very strong volume reversal day, Thursday's and then Friday's volume lost momentum and Friday's volume was less than half that of Wednesday's. More troublesome is the fact that indices are now nearing resistance levels. Theoretically a low volume pull back into resistance is an ideal short set up. In this case it may or may not be. Let's take a look at the QQQQ chart. Resistance on the QQQQ is roughly $39.60-$39.75. If the price can overcome this area this week, we should see a retracement back up near the broken 200-day average at $40.50, while the S&P and Dow test broken trend lines. Such a scenario would set up an ideal short and would allow us to keep open longs for a few more days. However, if the QQQQ rolls over at current overhead resistance, we are most likely going to see prices retest support just above $38.50. A roll over from the current level would not be the best short set up since strong support is just below. Instead it would most likely help build a much stronger base of support for a much stronger rally. Such a scenario would set up an ideal long trade. Decreasing volume into resistance last week suggests that we will see a retest of support this week, leading to a much better long set up as we move into the end of the month buying window.