Securities Research Services

Thursday, September 07, 2006

Stay Patient, Sentiment Will Swing Again

Yesterday the QQQQ (NASDAQ 100) left a strong sell signal as it failed at major resistance. On the chart below, the green line represents the 200-day average. On Tuesday the price closed strongly above this line, which we described yesterday as a temporary head-fake move designed to entice enthusiastic longs to buy more shares. Yesterday's gap back down and subsequent strong volume sell off confirmed our theory. The tech sector will probably bounce from yesterday's lows, but now any rally attempts are very likely to get stuck in the mud and prices will begin working their way lower; frustrating any hopeful longs who buy the dips. The SPY (S&P 500) moved down to support yesterday, but it has not yet provided a sell signal. Money flow perked up at the end of the day indicating that smart money has not yet determined that the rally is completely played out. There are just too many retail traders who have quickly jumped to the bear camp after yesterday's weakness. The market's perverse nature is likely to frustrate put option buyers by failing to provide immediate gratification. If the SPY can break below the blue uptrend line it closed at yesterday, it will signal a sell.

Right now we wouldn't be surprised to see the blue chips retest the highs. Should the S&P turn quickly around here and move back up to 1325, which we outlined yesterday as a magnet price for this index, those who turned bearish so quickly yesterday will very likely get bullish very quickly. The bottom line is that tops take a while to carve out. We expect to see some good shorting opportunities in tech over the next trading day or two. What we are going to be looking for is a bearish divergence between tech stocks and blue chips. If the S&P can indeed retest its highs, but the NASDAQ and semiconductors can only manage a weak bounce, we will aggressively short tech. If on the other hand the S&P is so weak that it can't hold support, there will be a number of breakdown plays, which should also provide shorting opportunities. Go long today if you are day trading, but don't look for any sustainable rallies to develop from here.

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