Snapshot Notes - August 25, 2006

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FRIDAY, AUGUST 25, 2006

PostCloseSummary

08/25/06 5:00 PM EST

Earlier this week, I wrote about the likelihood of seeing ever-tighter intraday ranges and diminishing liquidity as traders filtered out for their last gasp of summer vacation.

Over the past couple of days, the range in the S&P 500 has been extremely tight...in fact, the only other time this year that we saw consecutive days with such a tight range was on May 8 and May 9 - the peak of the spring rally.

Interestingly, we have seen similarly tight two-day ranges 9 other times over the past couple of years. The following day, the S&P was negative all 9 times, so it's not at all unusual to see weakness follow such compression. Given the overbought nature of several of our intraday guides (particularly the cumulative TICK), it seems likely that we'll see weakness in the short-term. I will be more interested in looking for short setups to begin the week, particularly so if the S&P falls below the 1290ish level.

We're going to have to deal with jumpy intraday price action, especially around the East Coast lunch hour, for the next week, but after the Labor Day break more normal trading patterns should emerge. The increasing lack of liquidity will make short-term trading a bit trickier than usual, but hopefully we'll see a setup or two that makes sticking around for the week worthwhile.

Have a safe and relaxing weekend and we'll see you next week!

ApproachingTheBell

08/25/06 3:25 PM EST

Ugh. That's about the best word that sums up this kind of summer trading for those with a short time frame (and most others, too).

Here's an interesting stat...there have been 9 times in the past two years when the S&P 500 cash index has been stuck under a 6-point intraday range for two consecutive days. The following day, the S&P was negative all 9 times, by an average of -0.6%. The only occurrence this year was the very peak of the spring rally on May 9.

Depending on your quote vendor, today may or may not qualify for that, but regardless the point is that very compressed intraday ranges have a tendency to resolve themselves to the downside. Given the relatively overbought nature of our cumulative TICK on the NYSE, that's the scenario I favor heading into early next week.

With such a thin tape (that's bound to get thinner next week), I suppose there's the chance that sellers will simply step aside and small-time buyers will be able to push us up over resistance, but I think that's more unlikely than the possibility of just drifting around or seeing a minor selloff.

LunchtimeLull

08/25/06 12:25 PM EST

How do we know it's summer? When the futures go more than a minute with less than 50 contracts traded.

On a typical day, even during the East Coast lunch hour, the S&P 500 e-mini futures will rarely go a minute seeing less than 500 contracts changing hands, but several times already today, that turnover was less than 50. The result for anyone who trades short-term is that prices get very "jumpy" and can actually gap from one price to the next - highly unusual behavior in hyper-liquid instruments like the e-mini futures, and a sign that it's best to be very careful as even a relatively small trader can move the market.

I noted this morning that about the only thing I saw that was mildly intriguing would be a short setup as we approached the recent highs and our more sensitive indicators became overbought. We haven't really had a chance to test that setup, either, as the major indices have steadily dropped from the opening buying salvo. This remains a very drifty, range-bound tape, and it is what we should expect for most of the days during the next week.

MidMorningOutlook

08/25/06 10:25 AM EST

Good Friday morning...We start off today with a steady rally off the opening bell, with tech taking the lead again. Implied volatility in the Nasdaq 100 is getting crushed this morning, as the VXN is down nearly 10% and is challenging its lowest point in the past couple of months.

The last few times the VXN declined below 18, it spelled imminent trouble for the NDX, so we'll see if the pattern holds. Our cumulative TICKs are beginning to tickle their overbought regions, particularly on the NYSE, which always makes me suspect of the sustainability of further gains.

I'd been looking for a move this week closer to 1280 - 1285ish on the S&P accompanied by at least a few oversold readings among our measures to set up what I thought would be a low-risk trade to the long side. It looks like the very modest retracement into Wednesday is all we're going to get, but as I've noted often before, I am not a momentum trader and don't do well chasing prices. The next setup for me would now likely be a short trade as the major indexes approach their recent highs and our most sensitive gauges become overbought.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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