Securities Research Services

Wednesday, October 25, 2006

Probabilities for a Correction Increase - But Don't Short Yet

Underperformance in the QQQQ compared to the SPY yesterday warns us that a correction is nearing. However, the QQQQ closed back at support and bears who shorted early are likely going to feel pain once again. The adage "be slow to go short" should prove true once again. One of these days – probably sooner than later – the top callers will be right. This market is feeding the top callers a great deal of pain though so it's best to just keep good stops on longs rather than going aggressively short here. One possibility we may see over the next two weeks is a tech sector that underperforms, but refuses to roll over, while the Dow and S&P continue to scratch out minor gains. We doubt that this market is heading for an exhaustion top here. Rather, it seems more likely that a healthy pullback will be the result of recent gains. The expected pullback would likely be a buying opportunity rather than a signal to go short. This is of course just one possibility out of many potential possibilities. For now, we remain in an uptrend, which is in tact until it is not.

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