Wednesday, August 16, 2006
The market continues to be very hard to trade. The short set up we had on the QQQQ yesterday was about as good as they come; perhaps too good. Perhaps the signal was so clear that the only thing that a truly contrarian market could do was to fade the signal. Or, perhaps the lower than expected PPI numbers released before the market yesterday gave bulls an unexpected opportunity to exact some pain from the shorts. The later is the most likely explanation for yesterday's surprise rally. The QQQQ is in a bear market and this rally does not change this fact. It is possible that when the CPI numbers come out today that they will compliment yesterday's PPI release and give the bulls more ammunition to put the bears in pain. As bears cover their shorts, the QQQQ could rally back up to major resistance at $39. This is the reality of bear market rallies. They are quick and painful and they reverse just as quickly as the stopped out bears can slap their heads and say "Doh!" ala Homer Simpson. Alas, we cannot argue with the market, we can only react to it. Should the QQQQ rally up to $39, we will short it aggressively. Until then, it is important to keep position sizes small and trade discipline high.