Securities Research Services

Thursday, October 05, 2006

Bulls Deliver a Potential Knockout Blow

On Monday the QQQQ broke down from the rising wedge pattern we have been concerned with. Then on Tuesday the price rallied back to test broken support (then resistance). We were waiting for confirmation in the form of a follow through lower from that test in order to trigger a reason to get heavily short. Yesterday the market voted and confirmation was not to be. Essentially what we have after yesterday is a failed breakdown in tech and a rally which occurred with broad scale buying. Failed breakdowns must be respected for they generally lead to hard rallies. Over the past two months we have provided a lot of reasons why the market should not rally. The market has disagreed for whatever reason. Some suggest that there is a concerted campaign to pump and rally the market into November's election season. We don't know. This explanation is certainly as good as any other because the obvious reasons for the rally just don't add up. Whatever the case, a few important things have changed since yesterday. Market breadth was good, as was new highs among individual stocks. Scans, which have been dismal for the past few days, have now turned up quite a number of bullish set ups. Likewise, the Russell 2000, which had been lagging blue chips badly, has moved up to test resistance and is threatening a breakout. Should small and mid caps take over, the ensuing rally could be strong. At times like this, it is important to just take your lumps and admit defeat. In other words, if you can't beat 'em, join 'em.

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