Securities Research Services

Tuesday, May 22, 2007

Price Matters

The QQQQ broke above its all important $47 yesterday. Though by the close it had given back half of its gains and closed right at this resistance level. Nevertheless, from a daily view, and even now on the weekly view, the charts look bullish.

It’s a very tough read here though. For on the day that the QQQQ finally made a move, the S&P and Dow both gave back intraday gains and closed red on heavier than normal volume. For the second week in a row these two indices marked a high volume distribution day in virtually the same price zone.

We scanned the tech sector heavily to see if there is something to the QQQQ breakout. So far there doesn’t appear to be. We couldn’t find one tech stock that we wanted to trade here. Even more distressing is the hard intraday reversal in the semiconductors. If tech is going to break out, it can’t really get far without the semis coming along for the ride (and preferably leading the way). But the Philadelphia Semiconductor Index and the SMH both have minor head and shoulders patterns and are now carving out the right shoulder, which tends to occur before a larger decline.

So what to do? As we said, that’s a tough one. Last August the QQQQ started to power higher in similar fashion. We fought it back then and found lots of reasons why the move shouldn’t be trusted. We also found lots of reasons why it should pull back any day. It ignored all of our “sound” reasoning and powered higher.

We need to be careful not to make the same error twice. Right now the QQQQ is at an important juncture. As noted, it has resistance at $47. If it can follow through and close above this level, then we need to throw out all of our reasoning why it shouldn’t be moving higher and just embrace the move. Right now we can’t find one problem with the QQQQ chart. Our biggest complaint is that we can’t find any underlying tech stocks to buy here. If the QQQQ follows through over the next day or two, hopefully that will change.

In the end, the only thing that matters is price.

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