Securities Research Services

Thursday, June 07, 2007

And the Roller Over has Begun

We have been bearish on the market for a little over 3 weeks now. Three weeks back we closed out all our long positions and took short positions on market indices. Since market tops are generally drawn out processes, it's been tough maintaining our bearish posture at times; especially when the QQQQ index experienced a false breakout last week.

We stuck to our guns though since last week's breakout occurred on low volume and was accompanied by bearish divergences in many of the leading indicators. More importantly, however, the fact that reliable trade set ups had dried up was a huge warning sign that something was just not right.

After yesterday's trading, we are tempted to yell "Vindication!" but it's probably still too early to declare victory just yet. Indeed, yesterday marked yet another important high volume distribution day. More importantly, breadth was extremely negative, with 75% of all stocks in the market in decline.

What this means is, we should now see stocks running into more and more resistance on the bounces that are sure to follow yesterday's decline. A waterfall type move lower is unlikely here, so if that is what you are expecting, you should probably adjust your expectations a bit. Sentiment is highly negative right now, so at a minimum, we are likely to see some of yesterday's short gains being given back.

Summary: Look for the market to drift lower following weak bounces.

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