Securities Research Services

Tuesday, March 06, 2007

Looking for a Bounce; Though We Wouldn't Trade it

More than two put options were purchased for every call option on both the SPY and QQQQ yesterday. This is an overly bearish sentiment reading. More subjective, but nevertheless compelling to us, is the fact that nearly every analyst and commentator we follow has calling for further downside today after the poor close yesterday.

They may very well be right about today, but market sentiment is moving toward and extreme and with oscillators so oversold here, we would expect to see some form of a bounce in the next day or two.

Will the coming bounce be tradable? In our opinion, no. Not unless you are ready to daytrade it and flip the proceeds very quickly. No, rather the coming bounce will likely relieve the overly sold indicators and will sooth the fears of the overly anxious crowd. It will likely even entice many of them to get bullish again and start buying.

We've seen this before though; all too often in fact. Bounce buyers are likely to be sorely disappointed as the bounce fails to follow through and meets with yet more selling. This crowd is getting frustrated, but hope remains alive for a quick recovery. Not until every last long is wringing her hands in frustration will the market finally make a tradable low.

So, we repeat again, the market is in a correction. Bounces are selling opportunities for at least one more leg down.

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