Securities Research Services

Thursday, August 17, 2006

Watch Profit Taking for a Clue on What Comes Next

Yesterday bulls got the numbers they wanted on the CPI release, allowing them to follow through on the rally started from the PPI numbers the day before. We are still shaking our heads over the failure of the strong bearish signal, which we outlined earlier in the week. In all the years we have traded, it's the first time we have seen this type of failure. Had sentiment figures been overly bearish prior to Wednesday, we would have discounted the set up. They were not. Today we will not try and make any new predictions, but will take a wait-and-see approach. Profit taking should start very near current levels. All indices are approaching major resistance levels. The question is, how will the market react to resistance? Will it reverse with a vengeance? Will it consolidate as dip buyers come in? At this point it's anybody's guess. We will abstain from trading until we get some better answers. It would have been wonderful to have had a crystal ball and to have been buying the ugliness last week, but it doesn't take a crystal ball to see that buying or selling at current levels is risky indeed. Especially with options expiring tomorrow.

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