Securities Research Services

Monday, May 14, 2007

Trading Range Reasserts Itself

Friday morning we provided a chart of the QID, the exchange traded fund (ETF), which trades polar opposite to the QQQQ (Nasdaq 100). In other words, when the QQQQ goes down, the QID moves up at double the speed.

We noted the heavy distribution day on Thursday, which caused the QID to spike on strong volume. The chart provided showed that the QID would necessarily need to follow through higher in order to signal that a new market downtrend was in effect. We also noted that while there was technical damage in the market, that sentiment was overly bearish, making a market breakdown unlikely.

In fact we were correct. Smart money, trading off bearish sentiment, bought Thursday’s dip on Friday morning and indices and stocks alike rallied as shorts felt the squeeze for yet again calling a top too soon.

The result?

We find that the market is still in a trading range, most easily viewed in the price action of the QQQQ. The range is roughly between $46-$47 on the QQQQ. Until $46 is breached into the close, or until $47 is broken through and held into the close, the range remains in tact and what happens next is anyone’s best guess.

The QQQQ still has major resistance in the $47 area and the semiconductors, which broke out of their range, are now back at their major resistance levels as well. The S&P suffered a strong intraday reversal on Thursday, indicating a top. As such, the bears seem to have the advantage here as the battle wages within the trading range. Nevertheless, the bulls have had control of this market for almost a year now and sentiment remains overly bearish, so don’t count the bulls out just yet.

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