Securities Research Services

Monday, July 17, 2006

Relief Bounce Likely, But Not Likely Sustainable...Yet

The market is oversold and due for a relief bounce. Keep in mind that any relief bounce should be shorted into at this point. Investors who were late exiting before this latest leg down in the sell off will be looking for better prices to exit. This will keep pressure on the market. Right now the market is in a confirmed intermediate downtrend. Until genuine capitulation takes place, the best policy will be to use the rallies to enter short positions. Currently we have a hypothesis about how this downtrend will play itself out. The QQQQ is trading in what looks to be a measured move pattern at this time. This means that the current leg down should run in equal length to the last leg down, from $42.00 to $38.50. Using the measured move hypothesis, we should see the QQQQ trade down to $35.00 before a sustainable rally can ensue. $35.00 also represents the next level of weekly support. Once a sustainable rally gets moving, it is possible that we could see a strong move up over the next month or two, perhaps even moving so far as to tag the broken support line at $39.00. Now, keep in mind that the 4-year cycle low is expected somewhere around November of this year. Thus, after the next sustainable rally (not to be confused with an expected one or two day bounce we are looking for this week), the market is likely to turn down again heading into November. November is expected to mark a significant buying opportunity for long term buyers. The trading opportunities heading into the 4-year cycle low should be nothing short of fantastic. Today we recommend not entering any new positions while we wait for the market to work off some of its oversold conditions. A lot of Friday's selling was an unwillingness to hold over the weekend in face of the ME crisis. Pressures should abate some as we start the new week.

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