Securities Research Services

Tuesday, February 20, 2007

Be a Bull, but be Careful

The QQQQ is back at the top of its range. It could theoretically power higher here, but we think the probabilities for a pullback to the bottom of the trading range are higher. The long term trend remains up and we continue to find many good long set ups.

All of this said, we are frankly a bit nervous here. Perhaps that's normal after making good gains on many positions recently. When we look at stocks on the daily charts, we are not seeing any warnings or signs of distribution, but prices are extended when measured against their standard deviation.

One of two things needs to take place when this happens then: Either prices will revert to their mean, or, a large breakout will occur, which will redefine the range of standard deviation. Since the trend is still up, we will cautiously lean toward the latter, but we need to be prepared to switch allegiances should prices decide to regress back to the mean here. In other words, be a bull here, but don't be afraid to turn bearish if necessary.

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