Securities Research Services

Sunday, August 03, 2008

Decision Time

The market has been trading indecisively over the past couple of weeks making it very difficult to pick a side to trade.

After breaking through support at $125 the SPY has bounced, but leadership has been non existent and we are not seeing large groups of stocks rally out of firm bases.

Scaling back to the weekly view it is clear that the SPY has been struggling below its 200-week average, now trading in the $129 area. Each rally attempt to this average has been turned back.

Nevertheless, indecision reigns supreme. While the long term downtrend is in tact the SPY looks poised to do one of two things here.

We could potentially see a rally over the next 6-8 weeks that takes the price back up to the falling downtrend, similar to the bear market rally which occurred last March through May. If a rally fails to develop then we are likely to see the SPY fail once again at its 200-week average and then turn back to test its multi year uptrend now situated in the $118 area.

As noted, we are not yet seeing stocks break out of firm bases, which puts the multi week bear rally scenario on thin ice. If such a rally is going to develop, we will need to see stocks behaving much better than they have been over the past few weeks. It could still happen, but we wouldn’t be making any long side trades until the market proves itself here.

As it now stands, we are finding many more short set ups than we are long.

Either way, it’s best to continue to be cautious at this stage. Until the market breaks this 2-3 week trading range either to the upside or the downside risk will remain high.

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