Monday, September 18, 2006
Friday's high volume gap up on the NASDAQ marked what is likely a near term top. Over the next few days we are likely to see indices work their way lower back to support levels. Currently the QQQQ has support at $39 and the SPY at $131. We will be operating under the thesis that the market will bounce from support as the crowd once again becomes too quickly bearish. The following bounce then should take early bears out of their positions as the S&P tests overhead resistance. From there, however, we should see the larger 4-year cycle reassert itself (see SPY chart below). On September 5 we outlined five reasons why we were expecting the market to return to this last summer's lows before it provides a true longer term buying opportunity. We were a bit early in our analysis at the time, but those reasons remain valid and by October they should assert themselves on the market. The QQQQ set up is a little more unclear as it has shown good relative strength lately. The bottom line: We are seeing some good long set ups at this time that should continue higher over the next couple of weeks. As we enter October the market becomes more vulnerable to a larger correction. Should the above scenario play out like it looks like it might, the return to the summer lows will provide an excellent long term buying opportunity. Participants are likely to be extremely bearish at that point and those who play it cautious as the market makes its top here will be in great shape to capitalize at very good prices indeed.