Securities Research Services

Friday, July 21, 2006

A Better Oversold Rally is Nearing

Options expire Saturday so expect more meaningless trading today as options sellers attempt to work stocks into their maximum pain points. The QQQQ dropped lower once again yesterday, but frankly we wouldn't trust a breakdown at these levels. A break lower is likely to lead to a strong intraday reversal and should signal the beginning of a decent countertrend rally that will last more than just one day. Gold has done a fairly good job confirming that a top is now in and so it should be considered to be trading in an intermediate downtrend now. Any bounces should be sold into in this sector; baring off course a strong reversal due to a serious erosion of Middle Eastern stability (unlikely). Likewise, oil stocks are continuing to experience real pressure, even as the price of oil holds above $70. We wouldn't short oil here, but we would avoid buying it at this time.

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