Securities Research Services

Friday, January 26, 2007

Trading Range Asserts Itself

Thursday's market really gave bulls a scare and has everyone talking about a potential market collapse again. We think that there is no reason to over think this market so much.

Let's put things into perspective.

The QQQQ, as seen above, has been ranging between $43.50 and $44.75 since November 15. It took one dip to its 50-day average in late December and tried to break out in early January, but the trading range held both moves in check and the market returned to its mean.

In other words, this has been a non trending market; a market trading sideways. Understanding this fact, we don't see any reason to interpret Thursday's move as either bullish or bearish as it was more just a reflection of the choppy nature of the current market.

If you look over at the bottom right of the chart, however, you will note that there is an upward sloping trend line. This line represents the up trend which started way back in July. The fact that the QQQQ has been trading in a tight trading range over the past nine weeks is a reasonably bullish development.

Look for the QQQQ to remain in this trading range for a few more weeks. There is some potential for prices to drop slightly below the range here, but that would take the QQQQ back to trend support where it should bounce. A drop to the trend here would be less bullish than a continued sideways move though. A drop to support here would cause some ugly divergences to develop on technical indicators and would call into question the ability to hold the trend. If the market can maintain this range, we should see significantly higher prices in coming months.

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