Tuesday, July 11, 2006
At the end of June the S&P 500 and Dow both rallied strongly over their downtrend lines indicating that the market correction had played itself out. Unfortunately the NASDAQ was not able to rally quite so far and while the blue chip indices have been holding up, the tech-heavy NASDAQ has been bleeding off. Likewise, the lead tech sector, the semiconductors, has proceeded to break down to even lower lows. All last spring the tech sector led the market lower as it underperformed. Now it is once again underperforming and the fact that we have not seen a strong follow through rally develop indicates that the market recovery attempt has failed. A slew of stocks continue to trade at 52-week lows and bounces have found distribution over the past few days. There is some indication that we will see one more thrust higher. The QQQQ has an open gap at $39, which could possibly fill. Likewise, it seems unlikely that the QQQQ will follow through lower after 4 days in a row of downside already at its back. The scenario we see possibly developing then is a sharp up move, which would stop out overly eager shorts, followed by a crumbling downturn. Due to the amount of distribution we have seen over the past few days, a downturn now could leave the market grasping for a floor only to find an air pocket below. In other words, This is a market for traders and traders should probably be easing into short positions on the bounces. Those holding intermediate long term positions should probably be in cash at this point.