Securities Research Services

Thursday, August 03, 2006

QQQQ Should Test Resistance

The tech-heavy NASDAQ continues to diverge from the blue chip S&P 500 and Dow indices. Until tech starts to lead the way, any move higher in the blue chip sector should be viewed with suspicion. We are operating under the theory that the NASDAQ, which has been the market leader on all rallies over the last few years, maintains its leadership role. As long as this leader is diverging bearishly against other sectors, the downtrend must be respected and strength must be faded (sold into). There is some evidence of accumulation in the small chip indices indicating we are in the middle of a basing cycle and not a distributive one. Nevertheless, it appears quite likely at this time that we will see the QQQQ head back down to its lows at least once more before it finds enough strength to make a break of its immediate downtrend. We do expect to see buyers continue to buy over the next few days lifting indices slightly higher. We suspect, however, that smart money will be using this as an opportunity to reload their short positions. Look for the QQQQ to test $37.40-$37.60 over the next day or two.

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