Securities Research Services

Tuesday, February 05, 2008

Whipsaw Risk Remains High

Yesterday we wrote that the potential for a pullback in the near term uptrend was high. Indeed, the market began a pullback, while volume levels decreased. Decreasing volume during the pullback favors the argument that the near term trend remains up.

Scans today revealed little to work with. Tech stocks look extremely weak here, but they remain oversold on their weekly levels and risk of whipsaw if you force a short in this sector is high.

Banking stocks may offer us a quick long trade if they continue to pull back in an orderly fashion (meaning that volume continues to rescind with the price).

The only change to the Risk Assessment Meter today was that sentiment moved from overly bullish back to neutral. This to favors the argument that we are experiencing merely a pullback in the near term uptrend.

If we can get a deep sell off today, we may be able to buy into the fear. Otherwise, prices may need at least another day or two to consolidate and pull back before it is safe to buy.


Long term, the market is in a confirmed downtrend. However, the near term trend is now up. Following the failure of Wednesday's sell signal the probabilities are now high that the price will return to the 40- and 50-week moving averages, giving the near term trend a price target of $143-$143.50.

Near term the price is currently extended a large distance from lower weekly Bollinger Band support without a pullback. Likewise, near term sentiment readings have moved into dangerous, overly bullish territory.


Over the next few weeks the likelihood that prices will regress back to their, as measured by the 40- and 50-week averages is high, which means that traders should have a long side bias here. Before new long positions can be safely taken, however, prices need to pull back to work off near term over bought conditions.

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