Thursday, September 28, 2006
The Dow made a new high yesterday, causing the media to turn on their hype machine, which finally convinced the crowds to buy this rally as measured by the OEX options pit, which sold nearly 3 call options on the S&P 500 to every put. This is where smart money wants the crowds. Smart money has been unloading into this rally as we showed yesterday. With the crowds finally reaching levels of exuberance, now smart money is able to short heavily into the euphoria without creating too much of a panic. The blue chips may have another day or two or even three to rally or at least maintain their highs. The QQQQ on the other hand, has lagged and is now primed for a top. Note the rising wedge pattern that has confined this rally over recent weeks. Yesterday the price bounced off overhead resistance, but found weak late day buying. Today, now that the crowds have had a chance to go home and watch the news and read their journals, they may be in an early buying mood today. This could theoretically push the QQQQ up to or even above $41. There we would look for sellers to step in heavily. For the second week in a row the SMH has been rejected at $35. Yesterday's hard reversal and failure to bounce at the end of the day even as the broader market recovered somewhat, is the canary in the mine that has stopped singing. This sector is the leading indicator for the broader tech sector and this sector tells us that tech is weak. Tops take time to form, but while the blue chips are working out their top, we suspect that, like the last top in April the QQQQ will start to come down early.