Securities Research Services

Thursday, June 08, 2006

Crash System Fails

RealMoney's James Altucher developed the J Quad Q Crash Trade several years ago. This trade is triggered when the QQQQ takes a crash run like it did last month. What is interesting about this trade set up is the fact that it predicted a tradable bounce an incredible 61 times in a row. Last week the trade triggered again only this time, number 62, it failed for the first time. Yesterday the QQQQ had a great set up. It was oversold and at support. Tuesday saw a late rally ensue and yesterday morning we had follow through. Then Greenspan spoke. For the third day in a row the market has been battered by Fed members and now the former Chairman speaking publicly about inflationary pressures. This is not new information. They are not telling the market anything it didn't already know. Even so, the Fedspeak has worried the market to the point that every buy set up has gotten hammered back. Yesterday's buy set up rejection was the most troubling as it puts support on the QQQQ into serious jeopardy. Let's take a look: Note the rejection, which coincided with Greenspan's comments, as the QQQQ tried to regain the $39-level. The ETF then proceeded to sell off with the market into the close and even closed below the all important last level of support found just above $38.50. Is this a breakdown and a signal to go short? Yes and no. Technically the QQQQ has broken support and the S&P 500 is threatening its 200-day average. The problem with getting aggressively short here however is the fact that this market has been nothing but whipsaws for weeks now. As soon as momentum gathers in one direction it spins on a dime and heads back the other way. The other problem with getting aggressively short here is that this is what the crowd is doing and the crowd is almost never right at market turns. Four put options were purchased for every one call yesterday. The crowd is obviously overly bearish. What do we do in this situation? Sit on our hands and don't trade. This is the only reasonable course of action to take when the signals are so mixed and the advantages are so hidden. The dust will settle and once it does the pathway will become clear once again. Today going long or going short are both crap shoots.

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